President Obama has said he will sign The Protecting Americans from Tax Hikes Act of 2015 (PATHA), which for the first time permanently enacts a number of the tax breaks generally dubbed the “Extenders” because of the need to extend them repeatedly year after year.
The House of Representatives passed the bill on December 17 and the Senate followed suit the next day. This represents the opportunity for an extended period of certainty for taxpayers who rely on these tax incentives but have to wait until December of each year to make business and personal decisions affected by them.
Several prominent business provisions that had expired at the end of 2014 not only were reinstated, but were also extended permanently. And some provisions have been significantly enhanced from their previous incarnations.
R&D Tax Credit – The research and development tax credit (R&D tax credit) encourages domestic research and experimentation by providing a tax credit for amounts incurred for qualified research expenses. Originally enacted in 1981, the research tax credit has been extended by Congress more than a dozen times. PATHA finally extends the research tax credit permanently, which should help empower companies to make long-term commitments to research activities.
Not only has the R&D credit been permanently extended, it has also been enhanced. Beginning in 2016 tax years, eligible small businesses (those with average annual gross receipts of $50 million or less) may claim the R&D credit against alternative minimum tax (AMT) liabilities, expanding the benefits first introduced in 2010. This is especially important to individuals who are partners or shareholders in S corporations that qualify as eligible small businesses, as they also benefit from the favorable AMT treatment.
Also beginning with 2016 tax years, start-up companies with gross receipts of less than $5 million may elect to claim the R&D credit against payroll tax liabilities.
Increased Section 179 Expensing Election – The Section 179 immediate expensing election had plummeted from $500,000 in 2014 to $25,000 in 2015. With PATHA, businesses with adequate taxable income can immediately deduct in 2015 and all subsequent tax years up to $500,000 of qualified tangible property (including off-the-shelf computer software). The Section 179 deduction begins to phase out when total qualified purchases for the year exceed $2 million.
Several enhancements to the Section 179 deduction take effect in 2016:
- The $250,000 cap on qualified real property (consisting of qualified leasehold improvements, qualified restaurant property and qualified retail improvement property) no longer applies,
- Air conditioning and heating units will be eligible property, and
- The $500,000 and $2 million limits both are indexed for inflation.
15-year Straight Line Cost Recovery – Traditionally depreciated over 39 years, qualified leasehold improvements, qualified restaurant property and qualified retail improvement now permanently can be depreciated over 15 years on a straight-line basis. Improvements must be made to the interior of non-residential real property more than three years after the building was placed in service. Qualifying restaurant and retail improvements can include improvements to owner-occupied or leased space while qualifying leasehold improvements may only include leased space (related party leases do not qualify).
Other permanently extended business provisions include the:
- 100 percent exclusion of gain from the sale of qualified small business stock held by non-corporate taxpayers for more than 5 years, and the gain will no longer be treated as an AMT preference item;
- Reduction of the recognition period for built-in gains of S corporations from 10 to 5 years;
- Basis adjustment to stock of S corporations making charitable contributions of appreciated property;
- Enhanced charitable deduction for contributions of food inventory; and
- Subpart F exception for active financing income.
Extended Through 2019
While not extended permanently, some business provisions received a healthy five-year extension through 2019:
Bonus Depreciation – Taxpayers can once again elect to take additional first-year (bonus) depreciation on qualifying asset purchases through December 31, 2019. The bonus depreciation percentage, however, decreases in the later years as follows:
Placed in Service During
Bonus Depreciation Percentage
As in previous iterations of the provision, qualifying assets generally include new tangible personal property, off-the-shelf computer software and qualified leasehold improvements. Qualified restaurant or retail property do not qualify for bonus depreciation unless the property also meets the definition of qualified leasehold improvements. PATHA also reinstates the corresponding election to accelerate AMT credits in lieu of claiming bonus depreciation, increasing the amount of AMT credits that can be claimed beginning in 2016.
Work Opportunity Tax Credit (WOTC) – The WOTC gives employers incentive to hire workers in certain targeted groups that have a high rate of unemployment. While it can vary by targeted group and number of hours worked, the credit generally is equal to 40 percent of the eligible employee’s wages up to $6,000 (a $2,400 credit).
In addition to extending the WOTC through 2019, PATHA also expands the targeted groups by adding qualified individuals who have been unemployed for 27 weeks or more.
Other business provisions extended through 2019 include the new markets tax credit and the look-through treatment for certain payments between related controlled foreign corporations (CFCs).
Extended Through 2016
Not to be left out, some of the narrower or less popular business provisions were extended through 2016. Though the long-term prospects for these provisions are unclear, the multi-year extension at least gives taxpayers that can benefit from the provisions the opportunity to do so. Business provisions extended through 2016 include the energy efficient commercial buildings deduction, several other energy incentives, and several incentives targeted at specific industries, such as the railroad, mining, horse racing, motorsports entertainment and film and television industries.
Businesses weren’t the only taxpayers to benefit from PATHA. Provisions benefiting individuals and families were extended as well. As with the business provisions, some individual provisions were extended permanently while others only extended through 2016. Refer to the chart below for a list of the more common individual provisions and whether they were extended permanently or through 2016.
|Up to $100,000 tax-free distribution from IRAs for charitable purposes by taxpayers age 70 ½ or older||Permanent|
|Deduction for state and local sales taxes||Permanent|
|Enhanced American opportunity tax credit for higher education expenses||Permanent|
|$250 above-the-line deduction for teacher classroom expenses||Permanent|
|Exclusion for employer provided mass transit and parking benefits||Permanent|
|Enhanced refundable child tax credit (not indexed for inflation)||Permanent|
|Enhanced earned income tax credit||Permanent|
|Charitable deduction for contributions of real property for conservation purposes||Permanent|
|Above-the-line deduction for tuition and fees||Through 2016|
|Exclusion of cancellation of indebtedness (COD) income from the discharge of qualified personal residence indebtedness||Through 2016|
|Deduction for qualified mortgage insurance premiums||Through 2016|
Other Notable Tax Provisions
The extenders weren’t the only tax provisions addressed by either PATHA or the year-end omnibus spending package. Other notable provisions include:
Cadillac Tax Delayed – The excise tax on high-cost health benefit plans known as the “Cadillac Tax” is one of the primary revenue raisers from the Affordable Care Act. Originally scheduled to take effect in 2018, the Cadillac Tax has been delayed until 2020. The excise tax also is now a tax-deductible expenditure.
Medical Device Tax Suspended – Another revenue generating provision from the Affordable Care Act, the 2.3 percent excise tax imposed on manufacturers of medical devices has been suspended for sales between January 1, 2016 and December 31, 2017.
529 Plans Enhanced – The definition of qualified higher education expenses that may be paid with tax-free distributions from Section 529 plans has been expanded to include computer equipment and technology.
Information Form Due Date Changes – While employers always had to provide employees or independent contractors with copies of the Form W-2s or Form 1099s by January 31, the copies filed with the federal government weren’t due until February 28, or March 31 if filing electronically. Beginning with statements issued for 2016 (filed in 2017), the government copies of these forms also must be filed by January 31. Congress hopes that by requiring these statements to be filed earlier, the IRS will be able to detect fraudulent tax refund claims more effectively.
Changes to Form W-2 Reporting – To help protect taxpayers from identify theft, the IRS permits the use of truncated taxpayer identification numbers on many information reporting forms, such as Form 1099 and Schedule K-1. The use of truncated ID numbers on Form W-2, however, was prohibited under the Internal Revenue Code. The new provision requires the employer to merely include an identifying number on Form W-2 rather than the Social Security number. This will give the IRS the ability to issue regulations permitting or requiring the use of truncated Social Security numbers on Form W-2, further protecting taxpayers from having their Social Security numbers fall into the wrong hands.
We’ve only discussed the more common tax provisions here. For more information about this legislation, contact your local CBIZ Tofias tax professional or you may contact us here. See below for a chart summarizing the major provisions, their extension periods, and whether they’ve been otherwise modified by the new legislation.
Select Provisions Extended or Made Permanent By the Protecting Americans from Tax Hikes Act of 2015
|BUSINESS & ENERGY PROVISIONS|
|R&D Tax Credit||Permanent||Yes|
|$500,000 Section 179 Expensing Election||Permanent||Yes|
|15-Year Depreciation for Qualified Leasehold, Retail Improvement and Restaurant Property||Permanent||No|
|100% Exclusion of Gain from Sale of Qualified Small Business Stock||Permanent||No|
|Reduction from 10 to 5 years the recognition period for built-in gains of S corporations||Permanent||No|
|Basis adjustment to stock of S corporations making charitable contributions of appreciated property||Permanent||No|
|Enhanced charitable deduction for contributions of food inventory||Permanent||Yes|
|Subpart F exception for active financing income||Permanent||No|
|Bonus Depreciation||Through 2019||Yes|
|Work Opportunity Tax Credit||Through 2019||Yes|
|New Markets Tax Credit||Through 2019||No|
|Look-through Treatment for Certain Payments between Related CFCs||Through 2019||No|
|Energy Efficient Commercial Buildings Deduction||Through 2016||No|
|$500 Credit for Nonbusiness Energy Property||Through 2016||Yes|
|Credit for Energy Efficient New Homes||Through 2016||No|
|Tax-free Distribution from IRAs for Charitable Purposes||Permanent||No|
|Deduction for State and Local Sales Taxes||Permanent||No|
|Enhanced American Opportunity Tax Credit||Permanent||No|
|$250 Above-the-line Deduction for Teacher Classroom Expenses||Permanent||Yes|
|Exclusion for Employer Provided Mass Transit and Parking Benefits||Permanent||No|
|Enhanced Refundable Child Tax Credit||Permanent||No|
|Charitable Deduction for Contributions of Real Property for Conservation Purposes||Permanent||Yes|
|Above-the-line Deduction for Tuition and Fees||Through 2016||No|
|Exclusion of COD Income from Discharge of Qualified Personal Residence Indebtedness||Through 2016||Yes|
|Deduction for Qualified Mortgage Insurance Premiums||Through 2016||No|