Prior to recessing for the holidays, the House and Senate passed the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). The President signed the Act and a FY 2016 omnibus on December 18. The Act goes well beyond the typical tax extenders legislation seen in prior years.
Listed below are overviews of several of the key provisions impacting businesses and individuals. Please contact us for a complete rundown of all of the changes and specifically those that apply to your particular tax returns.
Businesses
Code Sec. 179 Expensing
The dollar limit for Code Sec. 179 expensing for 2015 had reverted to $25,000 with an investment limit of $200,000. The Act permanently sets the Code Sec. 179 expensing limit at $500,000 with a $2 million overall investment limit before the phase out (both amounts are indexed for inflation beginning in 2016).
The Act also makes permanent the special Code Sec. 179 expensing for qualified real property. The Act also removes the $250,000 cap related to this category of expenditure beginning in 2016.
Bonus depreciation
The Act extends bonus depreciation (additional first-year depreciation) under a phase-down schedule through 2019:
• at 50 percent for 2015-2017
• at 40 percent in 2018
• at 30 percent in 2019
The Act also continues the election to accelerate the use of AMT credits in lieu of bonus depreciation and increases the amount of unused AMT credits that may be claimed in lieu of bonus depreciation. In addition, the Act modifies bonus depreciation to include qualified improvement property, and permits certain trees, vines and plants bearing fruits or nuts to be eligible for bonus depreciation when planted or grafted.
Certain longer-lived and transportation property may qualify for an additional one-year placed in service date.
Research tax credit
The research and development (R&D) tax credit is available to taxpayers with specified increases in business-related qualified research expenditures and for increases in payments to universities and other qualified organizations for basic research. The Act permanently extends and modifies the credit. This provision is likely the result of complaints that research investment requires years to realize potential and short extensions of the research credit were counterproductive.
Individuals
American Opportunity Tax Credit
The Act makes permanent the American Opportunity Tax Credit (AOTC), an enhanced version of the Hope education credit. The AOTC has been available at an increased level of $2,500, with adjusted gross income (AGI) phase-out amounts of $80,000 (single) and $160,000 (married filing jointly). The AOTC had been scheduled to expire after 2017.
Tuition & Fees Deduction
The Act extends through 2016 the above-the-line deduction for qualified tuition and fees for post-secondary education.
Child Tax Credit
The Act makes permanent the reduced earned income threshold amount of an unindexed $3,000. This provision had been scheduled to expire after 2017. Under the Act, the child tax credit, available up to $1,000 for qualifying dependents under age 17, may be refundable to the extent of 15 percent of the taxpayer’s earned income in excess of $3,000.
Charitable Distributions Direct from IRA
The Act permanently extends the provision for individuals age 70 1/2 and older to be allowed to make tax-free distributions from individual retirement accounts (IRAs) to a qualified charitable organization. The treatment continues to be capped at a maximum of $100,000 per taxpayer each year. Amounts in excess of $100,000 must be included in income but may be taken as an itemized charitable deduction, subject to the usual AGI annual caps for contributions. The Act also includes a provision on the deductibility of charitable contributions to agricultural research organizations.
Please note that the Internal Revenue Service will begin accepting individual tax returns on Tuesday, Jan. 19, 2016.