By Kenneth H. Bridges, CPA, PFS December 2015
As was the case last year, Congress again this year waited until December to let us know what the tax law would be for the year about to end. On December 18, President Obama signed into law The Protecting Americans from Tax Hikes Act of 2015 (the “PATH Act”). The catchy name of the legislation is actually quite accurate, as the legislation primarily extends (and in some cases greatly enhances) favorable tax rules which otherwise had expired at the end of 2014. Here is a brief synopsis of the major tax provisions in the legislation.
Research tax credit – The research credit, which has expired numerous times over the years and had expired at the end of 2014, has been reinstated retroactively to January 1, 2015 and has now been made permanent. Further, the credit has been greatly enhanced in two ways. First, for companies with average gross receipts for the three preceding years of $50 million or less, the research credit can now (for tax years beginning after 2015) be utilized against alternative minimum tax. Secondly, a “qualified small business” (those with gross receipts of less than $5,000,000 for the current year and no gross receipts in any year preceding the 5-taxable-year period ending with the current tax year) can elect to claim up to $250,000 of its research tax credit as a credit against employer FICA (the 6.2% OASDI portion). The credit is utilized in the first calendar quarter following the date on which the income tax return reporting the research credit is filed, and any excess carries forward. S-corps and partnerships can make this election at the entity level. This provision could be huge for early stage companies with no income tax to otherwise utilize the research credit against.
Bonus depreciation – For most new depreciable assets (other than buildings) placed in service during 2014, 50% of the cost could be expensed immediately. 50% bonus depreciation has been extended for 2015 through 2017. For 2018 it drops to 40%, and for 2019 it drops to 30%.
Section 179 expensing – For 2014, small companies (which for these purposes means those which have purchased less than $2,000,000 in furniture and equipment) could elect to immediately expense up to $500,000 of the cost of furniture and equipment against otherwise taxable profit. This immediate expensing amount dropped substantially beginning in 2015 (to $25,000). However, the PATH Act retroactively extends the $500,000 and $2,000,000 amounts to the beginning of 2015, makes these higher amounts permanent, and, for tax years beginning, in 2016, indexes the amounts for inflation. Also, the rule which made computer software eligible for the expensing election is extended retroactively and made permanent, and for tax years beginning after 2015 air conditioning and heating units are eligible.
15-Year write-off for qualified leasehold improvements, retail improvements and restaurant property – The special 15-year write-off (in lieu of 39.5 years) for qualified leasehold improvements, qualified retail improvements and restaurant property which had expired at the end of 2014 is extended retroactively and made permanent.
Expensing election for film, television and live theatrical production costs – The ability to immediately expense up to $15,000,000 ($20,000,000 in certain low-income or distressed areas) of film or television production costs (which had expired at the end of 2014) is extended to cover productions commencing before 2017 and will now include certain live theatrical productions.
9% rate for computing low-income housing tax credit – The minimum applicable credit percentage of 9% (the percentage multiplied by the eligible basis to determine the annual dollar amount of credit for each of the ten years) is made retroactive and permanent.
S-corp built-in gains period – S corporations that were formerly C corporations may be subject to what is known as the “built-in gains tax”. In a nutshell, the built-in gains tax applies when an S corporation disposes of assets that had unrealized built-in gain at the date of the S election. Historically, the tax has been imposed on assets disposed of during the ten-year period beginning with the first S-corp year. However, for 2009 and 2010 the recognition period was reduced to seven years, and for 2011 – 2014 it was further reduced to five years. The PATH Act retroactively and permanently makes the recognition period just five years.
100% gain exclusion for investments in Qualified Small Business Stock – Investments made in “Qualified Small Business Stock” (QSBS) after September 27, 2010 and before January 1, 2015 and held for more than 5 years can qualify for a gain exclusion of up to 100%, with no addback for alternative minimum tax purposes. To be eligible as QSBS, the stock must be of a domestic C-corp with total assets of $50 million or less and at least 80% of the corporation’s assets must be used in the active conduct of a qualified business. Effective for investments made on or after January 1, 2015, the exclusion dropped to 50% and any amount excluded was to be an addback in computing alternative minimum tax. However, the PATH Act has extended retroactively and permanently the 100% exclusion with no addback in computing alternative minimum tax.
Charitable distributions from IRAs – For 2014, individuals age 70 ½ or older could distribute up to $100,000 tax-free from their IRAs to certain charitable organizations without having to include the distribution in gross income. The distribution had to be made directly by the trustee to the charitable organization (note that it must be to a “50 percent organization” and not to a donor advised fund or supporting organization). The new legislation extends these provisions retroactively and permanently.
Work opportunity tax credit – The work opportunity tax credit is extended to cover individuals hired through 2019, and is expanded to include “qualified long-term unemployment recipients” (those unemployed for at least 27 weeks who received unemployment compensation during some part of that time).
Other provisions – Other provisions included in the PATH Act and related legislation include: extending the New Markets Tax Credit through 2019; extending permanently the higher income limitation (50% for most and 100% for qualified farmers and ranchers) and longer carryforward period (15 years) for qualified conservation contributions; making permanent the enhanced child tax credit, enhanced American Opportunity Tax Credit, enhanced earned income tax credit, $250 above-the-line deduction for educator expenses, deduction of sales tax in lieu of state income tax, and exclusion for employer-provided mass transit and parking benefits; extending through 2016 the exclusion for discharged mortgage debt, treatment of mortgage insurance premiums as qualified residence interest, above-the-line deduction for higher education expenses, and certain energy credits; suspending the medical device excise tax for 2016 and 2017; delaying implementation of the “Cadillac tax” on high-cost employer health insurance until 2020; suspending for 2017 the annual fee on health insurance providers; placing restrictions on tax-free spinoffs involving REITs; and making certain changes to the Subpart F and Controlled Foreign Corporation rules.
The above is mostly good news for taxpayers. The bad news is that this taxpayer-friendly legislation is projected to increase the deficit by over $600 billion.
Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP an Atlanta-based CPA firm.
This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice. The article provides only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional tax advisor.