Congress has once again extended the “tax extenders,” a varied assortment of more than 50 individual and business tax deductions, tax credits, and other tax-saving laws which have been on the books for years but which technically are temporary because they have a specific end date. This package of tax breaks has repeatedly been temporarily extended for short periods of time (e.g., one or two years), which is why they are referred to as “extenders.”
Most of the tax breaks expired at the end of 2014. But thanks to the recently enacted Protecting Americans from Tax Hikes Act of 2015 (i.e., the 2015 PATH Act), the extenders have been reviewed and extended once again. This time, though, Congress has taken a new tact. Instead of just rolling the entire package over for a year or two, it made some of the provisions permanent and extended the remaining provisions for either five or two years. It also made significant modifications to several of the provisions.
What follows is an overview of the key tax breaks affecting business and individuals that were extended by the new law.
Extended Business Credits and Special Depreciation and Expensing Rules
- The Research Credit has been made permanent. Additionally, beginning in 2016, eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax (AMT) liability, and the credit can be used by certain even smaller businesses against the employer's portion of the Social Security tax liability (i.e., FICA).
- The Minimum Low-Income Housing Tax Credit rate for non-federally subsidized new buildings has been made permanent.
- The new markets tax credit has been extended through 2019.
- Employer wage credit for activated military reservists has been made permanent. Beginning in 2016, the provision modifies the credit to apply to employers of any size, rather than employers with 50 or fewer employees, as under the prior law.
- The work opportunity tax credit has been extended through 2019. The new law also modifies the credit beginning in 2016 to apply to employers who hire qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more) and increases the credit with respect to such long-term unemployed individuals to 50 percent of the first $6,000 of wages.
- Qualified zone academy bonds have been extended through 2016.
- Three-year depreciation for racehorses has been extended through 2016.
- The 15-year straight line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements has been made permanent. The new law also modifies the deduction to permit taxpayers to elect out of the accelerated depreciation rules.
- The 50 percent bonus depreciation has been extended for property placed into service during 2015 through 2017. The 50 percent rate is phased down to 40 percent for property placed into service during 2018 and 30 percent for property placed into service during 2019. Phase-down is also required for the $8,000 increase for bonus-depreciation eligible cars of the first-year depreciation and expensing dollar cap for cars. The provision makes qualified building improvements (no longer just qualified building leasehold improvements) bonus depreciation-eligible and permits most plants bearing fruit or nuts to be eligible for bonus depreciation when planted or grafted rather than when income-producing.
- The enhanced charitable deduction for contributions of food inventory has been made permanent. The new law modifies the deduction by increasing the limitation on deductible contributions of food inventory from 10 percent to 15 percent of the taxpayer's adjusted gross income (15 percent of taxable income in the case of a C corporation) per year and also modifies the deduction to provide special rules for valuing food inventory.
- An increase in elective business expensing under Code Section 179 (up to $500,000 annual write-off of eligible business property costs that is phased out once those costs exceed $2,000,000 for the year) has been made permanent. The allowance of expensing for computer software and qualified real property (certain leasehold improvement, retail improvement, and restaurant property) has also been made permanent. The $500,000 and $2,000,000 limits are indexed for inflation for tax years beginning after 2015. Expensing is allowed for air conditioning and heating units placed into service in tax years beginning after 2015. The $250,000 cap on the expensing of qualified real property has been eliminated for tax years beginning after 2015. The election and the specifics of the election are made revocable.
- The deduction allowable with respect to income attributable to domestic production activities in Puerto Rico has been extended through 2016.
- The exclusion from a tax-exempt organization's unrelated business taxable income (UBTI) of interest, rent, royalties, and annuities paid to it from a controlled entity has been made permanent.
- The exclusion of 100 percent of gain on certain small business stock has been made permanent. The new law also permanently extends the rule that eliminates such gain as an AMT preference item.
- The basis adjustment to stock of S corporations making charitable contributions of property has been made permanent.
- The reduction in the S corporation recognition period to five years for built-in gains tax has been made permanent.
- The empowerment zone tax incentives have been extended through 2016. The new law modifies the incentive by allowing employees to meet the enterprise zone facility bond employment requirement if they are residents of the empowerment zone, an enterprise community, or a qualified low-income community within an applicable nominating jurisdiction.
Extended Individual Provisions
- Tax credits for low to middle wage earners that were originally enacted as part of the 2009 stimulus package and were slated to expire at the end of 2017 have been made permanent. These tax credits are:
- The American Opportunity Tax Credit, which provides up to $2,500 in partially refundable tax credits for post-secondary education
- Eased rules for qualifying for the refundable child credit
- Various earned income tax credit (EITC) changes
- The $250 above-the-line deduction for teachers and other school professionals for expenses paid or incurred for books, certain supplies, equipment, and supplementary material used by the educator in the classroom has been made permanent. Beginning in 2016, the $250 cap will be indexed to inflation and include professional development expenses.
- The exclusion of up to $2 million ($1 million if married filing separately) of discharged principal residence indebtedness from gross income has been extended through 2016. The new law also modifies the exclusion to apply to qualified principal residence indebtedness that is discharged in 2017, if the discharge is pursuant to a binding written agreement entered into in 2016.
- The deduction for mortgage insurance premiums deductible as qualified residence interest has been extended through 2016.
- The option to take an itemized deduction for State and local general sales taxes instead of the itemized deduction permitted for State and local income taxes has been made permanent.
- The increased contribution limits and carry forward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes has been made permanent. The new law also extends the enhanced deduction for certain farmers and ranchers.
- The above-the-line deduction for qualified tuition and related expenses has been extended through 2016.
- The provision that permits tax-free distributions to charity from an individual retirement account (IRA) of up to $100,000 per taxpayer per tax year, by taxpayers age 70 1/2 or older has been made permanent.
The new legislation also includes a two-year delay in a pair of new taxes installed as part of the healthcare reform law: a levy on medical devices (which would have started in 2016) and another on high-end health insurance plans, known as the “Cadillac tax,” which would have applied beginning in 2018.
If you would like more details about these changes of any other aspect of the new law, or if you would like to discuss how these changes may impact your business or personal tax planning, please do not hesitate to contact a member of Kreischer Miller’s Tax Strategies group at 215.441.4600.
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