On December 18th, 2015, Congress passed and President Obama signed the “Protecting Americans from Tax Hikes (PATH) Act of 2015” that made permanent various business and individual tax deductions, credits, and incentives. The bipartisan legislative compromise ends an era of confusion for families, businesses, and tax preparers who could not adequately plan for the tax implications of various decisions that are made throughout the year. Some of the extended provisions are as follows:

Business:
Section 179
Section 168 Bonus Depreciation
Work Opportunity Tax Credit
S Corp. Recognition Period for Built-In Gains
Exclusion of Gain on Section 1202 Stock
Research Credit
Cadillac Tax

Individual:
Charitable Giving
Sales Tax
Mortgage Insurance Premiums
Tax Credits
Discharge of Home Mortgage Debt
Higher Education Expenses

Business:

Section 179
The new Act is retroactive so as to not leave out tax years beginning in calendar year 2015. It makes permanent the expensing of up to $500,000 annually of the cost of qualifying property. However, as was true for earlier years for which the $500,000 limit was in place, the amount of expensing allowed is subject to gradual reduction (down to zero) once the total qualifying property placed in service during the year exceeds $2 million. In addition, the Act makes permanent the eligibility for expensing of most computer software, the eligibility for expensing of qualified real property (certain leasehold building improvements, retail building improvements and restaurant property), and the ability to revoke an election, or change its specifics, without IRS consent.

For tax years beginning after calendar year 2015 (post-2016 years), the new Act indexes both the $500,000 and $2 million limits for inflation, ends the exclusion from expensing of air conditioning and heating units and removes the $250,000 cap on qualified real property expensing. Please note that the capped expensing nevertheless also had to be applied against the $500,000 limit.

Section 168 Bonus Depreciation
Bonus depreciation, while extended, was never meant to be permanent and the Act will phase it out over the next five years. 50% bonus depreciation is extended for property placed in service during 2015 through 2019 (but 2016 through 2020 for certain property with a longer production period and certain aircraft). Going forward, the 50% rate is phased down to 40% for property placed in service during 2018 (but 2019 for the long production period property and aircraft), and 30% for property placed in service during 2019 (but 2020 for the long production period property and aircraft). The Act makes qualified building improvements (no longer just qualified building leasehold improvements) bonus depreciation eligible as well.

Work Opportunity Tax Credit
The Work Opportunity Tax Credit, while not permanent, has been 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% of the first $6,000 of wages.

S Corporation Recognition
The Act permanently provides a 5 year recognition period for determining the net recognized built-in gains.

Exclusion of Gain on Section 1202 Stock
The Act permanently extends the 100% exclusion and the exception from minimum tax preference treatment.

Research Credit
The Research Credit has been 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 (FICA) liability.

Cadillac Tax
In what is seen as a bipartisan blow to the funding provisions of the Affordable Care Act, the PATH Act includes a two-year delay on 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. When the “Cadillac tax” goes into effect in 2020, the tax will be deductible for income tax purposes.

Individual:

Charitable Giving
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 has been made permanent.

Sales Tax
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 has been made permanent.

Mortgage Insurance Premiums
The deduction for mortgage insurance premiums deductible as qualified residence interest has been extended through 2016.

Tax Credits
Tax credits for low and middle wage earners that were originally enacted as part of the 2009 stimulus package and were slated to expire at the end of 2017 have been made permanent. These tax credits are the American Opportunity Tax Credit, which provides up to $2,500 in partially refundable tax credits for post-secondary education, and eased rules for qualifying for the Refundable Child Tax Credit.

Discharge of Home Mortgage Debt
The Act extends the exclusion for discharge of home mortgage debt through 2016. The limit remains at $2 million ($1 million if married filing separately).

Higher Education
The Act extends the above-the-line qualified tuition and related expenses through 2016.

As 2015 winds down and the beginning of 2016 approaches, please reach out to us for your business and individual tax planning and compliance needs.