What it is:
The tax extenders bill is an extension of upwards of 50 tax provisions that benefit taxpayers. In recent years, Congress has used the tax extenders bill to retroactively implement certain provisions that had expired the year before. This year’s extenders bill (Protecting Americans from Tax Hikes Act of 2015 or the PATH Act) made many of the law’s most popular provisions permanent and extended many others.
What it means:
The PATH Act makes several tax provisions permanent members of the Internal Revenue Code and extends many others. Additionally, the PATH Act retroactively extends some of the provisions which expired at the end of 2014, making them available for taxpayers in 2015. Finally, it modifies some provisions going forward from 2016.
- The Research and Development Tax Credit. This credit gives taxpayers a dollar-for-dollar reduction in their tax liability for qualifying research and development expenditures. This provision expired on December 31, 2014, but was retroactively extended by the PATH Act. Additionally, the PATH Act modified the credit (beginning in 2016) to make it available to more taxpayers by:
a. Allowing the credit to be applied to a taxpayer’s Alternative Minimum Tax liability
b. Allowing qualifying start-up firms to use the credit against their payroll tax liabilities
- The limit on full-expensing of fixed asset purchases (commonly known as the Section 179 deduction) has been permanently set at $500,000. Additionally, this limit will be indexed to inflation.
- The availability of 15-year cost recovery (as opposed to 39-year) treatment for qualified leasehold improvements, qualified restaurant buildings and improvements, qualified retail improvements was made permanent.
- The provision allowing taxpayers to exclude 100 percent of the gain on qualified small business stock has been made permanent.
- Corporations who make an S-Election are subject to a built-in gains tax on appreciated property as of the date of the election. The built-in gains tax typically applies if the property is sold within a 10-year window. The PATH Act permanently reduced this window to 5 years.
- The ability for taxpayers to make tax-free distributions from their retirement accounts for charitable purposes has been permanently extended.
- The ability to deduct state and local sales tax instead of state and local income taxes has been made permanent.
- Bonus Depreciation, a provision allowing taxpayers to expense 50 percent of the cost of new fixed asset purchases, has been extended for four years. This provision also includes a phase-out of the deduction, with taxpayers only allowed to expense 40 percent of qualifying property in 2018 and 30 percent in 2019. The provision is set to expire altogether on December 31, 2019.
- The Work Opportunity Credit, allowing businesses a credit for wages paid to certain groups of people (like veterans) was extended through 2019. Additionally, employers who pay qualifying wages to individuals who have been unemployed for more 27 weeks are now eligible to take a credit.
- The New Markets Tax Credit, allowing a credit for investment in certain communities, has been extended through 2019.
- A provision allowing taxpayers to exclude debt-forgiveness income on principal residences (homes that are “underwater” on their mortgages) has been extended through 2016.
- Taxpayers who pay mortgage insurance premiums will be allowed to deduct those payments as mortgage interest through 2016.
- Taxpayers who pay qualified tuition and fees may take an above-the-line deduction for those expenses (so long as they meet income requirements and do not take advantage of credits for education expenses) through 2016.
On a lighter note:
Included in the PATH Act is a redefinition of hard cider. Hard cider producers have frequently had their products taxed as wine or champagne due to varying levels of alcohol content and carbonation levels in the product. Wine and champagne are subject to a higher federal excise tax than hard cider. The PATH Act redefines hard cider to include pear as well as apple and uses higher alcohol content limitation (8.5% as opposed to 7.0%) and higher carbonation levels, allowing more hard ciders to be taxed at the lower excise tax rate.
What you can do:
As mentioned above, the PATH Act affects more than 50 provisions in a 233-page bill. Give us a call to talk through provisions that might be helpful to your tax situation.