Tax Extenders Bill Signed Into Law December 18, 2015
On December 18, 2015, the President signed into law the tax extenders bill, entitled the Protecting Americans from Tax Hikes (PATH) Act of 2015.
The new law makes more than 20 tax breaks permanent and retroactively extends others for two or more years.
"By passing this important tax package that provides permanent relief for American families and job creators, we cap a year of historic policy victories under the Republican-led Senate and lay the groundwork for comprehensive tax reform moving forward. Congress is back to work for the American people", Senate Finance Committee Chairman Orrin G. Hatch, R-Utah, said in a statement
Repeatedly for several years, numerous tax provisions that were scheduled to lapse were reinstated (i.e., “extended”). The new legislation does the same thing once again. It retroactively reinstate for 2015 the tax extenders that were previously renewed and then expired at the end of 2014.
However, one saving grace about the new tax extender legislation is that many of the provisions are permanently renewed. From the popular qualified charitable distribution (QCD) rules for making charitable contributions from an IRA for those over age 70 ½, to the American Opportunity Tax Credit for college, and the deduction for state and local sales taxes in lieu of the deduction for state income taxes. For tax planning purposes, this is a good thing.
Here's a rundown of key business, individual, and miscellaneous provisions:
Business Tax Provisions
Section 179 expensing:
The maximum first-year expensing deduction of $500,000 is permanently restored for qualified business property with a phaseout threshold of $2 million. It will be indexed for inflation for 2016 and thereafter.
This is a significant and positive change! The maximum first-year deduction was scheduled to drop to only $25,000 with a $200,000 phaseout threshold.
The 50% bonus depreciation for qualified business property is retroactively extended to 2015. The percentage will be reduced to 40% for 2018 and then 30% for 2019. After 2019, bonus depreciation will completely expire unless it is extended again.
15-year cost recovery:
The tax law provision allowing taxpayers to use a straight-line cost recovery period of 15 years for qualified leasehold, restaurant and retail is permanently extended. The usual cost recovery period is 39 years.
Research and development credit:
The credit for research and development expenses is made permanent with certain modifications. The alternative simplified credit is increased from 14% to 20%. Small businesses may be able to offset alternative minimum tax (AMT) liability. Start-ups can offset payroll taxes, beginning in 2016.
S corporation changes:
The five-year recognition period for built-in-gain (BIG) following a conversion to S corporation status has been made permanent. The PATH Act also permanently extends the basis adjustment in stock when an S corporation makes charitable donations of property.
Qualified small business stock (QSBS):
The 100% tax exclusion for investors in QSBS, which was scheduled to be reduced to 50% for QSBS acquired after 2014, is retroactively extended and made permanent. This tax break requires a five-year holding period.
Work Opportunity Tax Credit (WOTC):
The WOTC, available for hiring workers from targeted economic groups and military veterans, is extended through 2019.
New markets tax credit:
The PATH Act authorizes allocation of $3.5 billion of new markets credits retroactive to 2015 and through 2019.
Individual Tax Provisions
State and local sales taxes:
The option to deduct either state and local sales taxes or state and local income taxes, whichever is greater, has been made permanent. For taxpayers living in states without a personal income tax, such as Nevada, Texas, Florida, and some other states, this a great news.
Keep in mind, not only is the general sales tax amount allowed by the federal government deductible, which is based on the taxpayer's income, sales tax paid on big ticket items, such as cars and boats, may be added to the general sales tax amount, increasing the amount the sales tax deduction.
American Opportunity Tax Credit (AOTC):
The PATH Act makes permanent an enhanced AOTC, with a maximum deduction of $2,500 and phaseout thresholds of $80,000 for single filers and $160,000 for joint filers. It was scheduled to expire after 2017.
In lieu of one of the two higher education credits, parents may claim a tuition-and-fees deduction, subject to phaseouts based on modified adjusted gross income (MAGI). The deduction is extended through 2016.
Child tax credit:
The enhanced child credit, which allows for a refundable portion with a reduced income threshold, is made permanent. This provision was scheduled to expire after 2017.
Charitable distributions from IRAs:
The provisions allowing tax-free distributions by individuals age 70½ or older directly from their IRAs to qualified charities has been made permanent. The annual limit is $100,000 per taxpayer.
Charitable conservation property:
Generally, gifts of property to charity are limited to 35% of adjusted gross income (AGI). However, a special provision permits deductions of conservation property of up to 50% of AGI (100% for farmers and ranchers). This provision is now permanent.
Earned income tax credit (EITC):
The PATH Act makes permanent certain enhancements in the EITC for lower-income taxpayers. Previously, the enhancements were only available though 2017.
Employee transportation benefits:
The tax-free monthly benefit for three transportation benefits – mass transit passes, van pooling and parking fees – is permanently equalized. The monthly benefit of $250 will be indexed for inflation for 2016 and thereafter.
Educator classroom expenses:
The $250 above-the-line deduction for qualified out-of-pocket expenses of teachers and other educators is made permanent. It will be indexed for inflation for 2016 and thereafter.
Mortgage debt exclusion:
The tax exclusion for mortgage forgiveness on up to $2 million of debt on a principal residence is extended, with certain modifications through 2016.
Mortgage insurance premiums:
This provision allows taxpayers to deduct mortgage insurance premiums subject to a phaseout beginning at $100,000 of AGI. The deduction is extended through 2016.
Residential energy credit:
The latest version of the residential energy credit, which provides a lifetime credit of up to $500 for 10% of qualified expenses, is extended through 2016.
Miscellaneous Tax Provisions
Affordable Care Act (ACA):
The PATH Act delays for two years, from 2018 to 2020, imposition of the Cadillac tax on high-priced health insurance plans. It also places a moratorium on the ACA tax on medical devices for two years – 2016 and 2017 – and the health insurance provider fee for one year, 2017.
Section 529 plans:
Funds in Section 529 college savings plans may be distributed tax-free for qualified higher education expenses. The PATH Act permanently extends the rule allowing computers and related equipment to be treated as qualified expenses.
Achieving a Better Life Experience (ABLE) Accounts:
With an ABLE account, tax-free distributions may be made on behalf of a qualified disabled individual. The PATH Act permits tax-free rollovers from a 529 plan to an ABLE account if certain requirements are met.
Savings Incentive Match Plan for Employees (SIMPLE):
The PATH Act generally permits tax-free rollovers from an employer-sponsored qualified plan to a SIMPLE plan.
Taxpayer Bill of Rights:
Previously, the IRS had proposed a Taxpayer Bill of Rights, which is now made a permanent part of the tax code.
Real estate investment trusts (REITs):
The PATH Act includes provisions relating to REITs, including changes involving tax-free spinoff.
Download the PATH ACT