TAX BREAKS AFFECTING BUSINESSES
Section 179 Expense
The previously expanded Section 179 deduction limit of $500,000 along with its increased investment ceiling of $2,000,000 expired for tax years beginning after 2014 and was scheduled to revert back to the lower deduction limit of $25,000 and the investment limit reduced to $200,000.
However, the PATH Act makes the higher limits of $500,000 deduction and $2,000,000 investment permanent for tax years beginning after 2014. These amounts will be indexed for inflation in future years.
Bonus First-Year Depreciation
Under prior law, an additional first year depreciation deduction (also called “bonus” depreciation) was allowed equal to 50% of the adjusted basis of new property placed in service before January 1, 2015. The PATH Act extends the 50% bonus depreciation retroactively for 2015 and forward through 2017. The 50% bonus depreciation amount is reduced to 40% for qualified property placed in service in 2018 and to 30% in 2019. The enhanced first year depreciation cap for new autos and trucks is extended through 2019 as well.
Research and Development Credit
This business credit has been one of the most frequently extended over its lifetime. Congress has never been able to find a way to agree to extend this credit for more than a year or two at a time, which made planning for this credit difficult. However, Congress has finally done away with the “temporary” nature of this credit and made it permanent for qualified amounts paid or incurred after December 31, 2014.
Reduction in S Corporation Recognition Period for Built In Gains (BIG) Tax
The PATH Act retroactively and permanently provides that for determining the net recognized built-in gain, the recognition period is a five year period. This provision applies to S-corporations that previously were regular C-corporations with built in gains at the S election date. Under prior law, this recognition period reverted back to the ten year recognition period for 2015.
TAX BREAKS AFFECTING INDIVIDUALS
Nontaxable IRA Transfers to Eligible Charities
For tax years beginning before January 1, 2015, taxpayers who were age 70 ½ or older could make tax-free distributions to a charity from an Individual Retirement Account (IRA) of up to $100,000 per year. The PATH Act retroactively revives and permanently extends the ability of individuals at least 70 ½ years of age to exclude from gross income qualified charitable distributions from IRAs of up to $100,000 per year.
Exclusion for Discharged Home Mortgage Interest Debt
Discharge of indebtedness income from qualified principal residence debt, up to a $2 million limit was excluded from gross income for tax years beginning before 2015. The PATH Act extends this exclusion for two additional years so it applies to debt discharges before January 1, 2017 on qualified principal residence debt.
Deduction for Mortgage Insurance Premiums
Mortgage insurance premiums paid or accrued before January 1, 2015 by a taxpayer in connection with acquisition indebtedness with respect to a taxpayer’s qualified residence were treated as deductible qualified residence interest. This deduction is subject to phase out based on income limitations. The PATH Act extends this provision for an additional two years, so that a taxpayer can deduct as qualified residence interest, mortgage insurance premiums paid or accrued before January 1, 2017.
Above the Line Deduction for Educator Expenses
This popular deduction for educators of $250 for classroom supplies expired as of December 31, 2014. The PATH Act permanently extends this deduction and the $250 amount will indexed for inflation for 2016 and future tax years.
Education Expenses and Credits
The PATH Act extends the above the line deduction for higher education expenses retroactively for 2015 and through 2016. The Act also makes permanent the American Opportunity Tax Credit. This credit was scheduled to expire for tax years after 2017 under prior law.
State and Local Sales Tax Deduction
Under prior law, taxpayers that could itemize deductions, could elect to deduct state and local sales taxes instead of state and local income taxes if the sales taxes yielded a higher deduction. Effective for tax years beginning after 2014, the PATH Act retroactively revives and makes permanent the option to claim an itemized deduction for state and local general sales taxes in lieu of an itemized deduction for state and local income taxes. Practically speaking, the deduction for state and local sales taxes affects those that live in states that have no income tax or little of their income is taxable to their state of residence.
This is intended to be a general summary of the highlights of the PATH Act of 2015, as particular circumstances will vary. If you have any questions concerning any of the above, your Maillie LLP representative would be happy to discuss in further detail.