On December 18, 2015, President Obama signed into law the Consolidated Appropriations Act, 2016, including the Protecting Americans from Tax Hikes Act of 2015 (PATH) that extended the “extenders”—a varied assortment of more than 50 individual and business tax deductions, tax credits and other tax-saving laws that have been on the books for years but which technically are temporary because they have a specific end date. Most of the tax breaks expired at the end of 2014, but PATH revived the extenders once again. However, this time, Congress has taken a new tack. Instead of rolling the package of provisions over for a year or two, it made some of them permanent and extended the remaining provisions for either two or five years, while making significant modifications to several other provisions. Below is a snapshot of various individual and business tax provisions that may impact your personal or business tax situation.
For individuals, the extended provisions include, but are not limited to:
- Education and Child Credits – slated to expire at the end of 2017 and now made permanent are (1) the American Opportunity Tax Credit, which provides up to $2,500 in partially refundable tax credits for post-secondary education; and (2) the refundable child credit, with modified rules for qualification.
- Educators’ Above-the-Line Deduction – 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 made permanent; also modified, beginning in 2016, to index the $250 cap to inflation and include professional development expenses.
- Principal Residence Indebtedness – the exclusion of up to $2 million ($1 million if married filing separately) of discharged principal residence indebtedness from gross income 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.
- Mass Transit and Parking Benefits – parity for the exclusions for employer-provided mass transit and parking benefits made permanent. The act provides $250 per month in 2015 and $255 per month in 2016 in pre-tax savings to help reduce costs for taxpayers using mass transit.
- Mortgage Insurance Premiums – the deduction for mortgage insurance premiums deductible as qualified residence interest is extended through 2016.
- State and Local Sales Taxes – 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 made permanent.
- Tuition Costs – the above-the-line deduction for qualified tuition and related expenses is set to expire at the end of 2016 and permits a deduction of up to $4,000 (for single taxpayers with adjusted gross income (AGI) of $65,000 or less, and $130,000 or less for taxpayers married filing jointly). Complete phase-out occurs for single taxpayers with AGI exceeding $80,000 and married taxpayers filing jointly with AGI exceeding $160,000.
- Tax-Free Contributions from IRAs – 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 70½ or older, made permanent.
For businesses, the extended business credits and special depreciation and expensing rules include but are not limited to:
- Research Credit – 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 portion of the employer’s payroll tax (i.e., FICA) liability.
- Minimum Low-Income Housing Tax Credit – made permanent for non-federally subsidized new buildings.
- Military Housing Allowance – exclusion for determining whether a tenant in certain counties is low-income (differential wage payment credit) made permanent.
- Employer Wage Credit for Activated Military Reservists – 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 prior law.
- Work Opportunity Tax Credit – 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.
- 15-Year Straight Line Cost Recovery for Qualified Leasehold Improvements, Qualified Restaurant Buildings and Improvements, and Qualified Retail Improvements – made permanent.
- 50-Percent Bonus Depreciation – extended for property placed in service during 2015 through 2019; the 50-percent rate is phased down to 40 percent for property placed in service during 2018 and 30 percent for property placed in 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.
- Alternative Minimum Tax (AMT) Credits – the election to accelerate credits in lieu of additional first-year depreciation is extended for property placed in service during 2015; the provision modifies the AMT rules beginning in 2016 by increasing the amount of unused AMT credits that may be claimed in lieu of bonus depreciation.
- Enhanced Charitable Deduction for Contributions of Food Inventory – 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.
- Elective Business Expensing – made permanent (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); also made permanent is the allowance of expensing for computer software and qualified real property (certain leasehold improvement, retail improvement and restaurant property). 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 in service in tax years beginning after 2015. The $250,000 cap on the expensing of qualified real property is eliminated for tax years beginning after 2015. The election and the specifics of the election are made revocable.
- Special Expensing Rules for Certain Film and Television Productions – extended through 2016; the new law modifies the rules to apply to the cost of live theatrical productions.
- 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 is made permanent.
- Payments Between Related Controlled Foreign Corporations (CFCs) – under the foreign personal holding company rules, look-through treatment is extended through 2019.
- Gain on Certain Small Business Stock – the exclusion of 100 percent of gain is made permanent; the new law also permanently extends the rule that eliminates such gain as an AMT preference item.
- Basis Adjustment to Stock of S Corporations’ Charitable Contributions of Property – made permanent.
- Reduction in S Corporation Recognition Period for Built-in Gains Tax – made permanent.
- Empowerment Zone Tax Incentives – 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.
- Healthcare Reform – 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.