On Friday, December 18, 2015, Congress passed an important tax bill that has finally given us some certainty in tax law. The Protecting Americans from Tax Hikes (PATH) Act of 2015 has retroactively restored a number of popular tax breaks for either a two-year or five-year period and has made some provisions permanent. Here is what the PATH Act of 2015 means for your and your business:
Research tax credit. The bill makes the research and development tax credit (R&D credit) permanent. In addition, the bill provides significant expansion of the R&D credit. Beginning in 2016, eligible small businesses ($50 million or less in gross receipts) may claim the R&D credit against the alternative minimum tax (AMT). Additionally, certain small businesses ($5 million or less in gross receipts) will have the ability to offset the credit against payroll tax liability (for up to five years).
Extension and modification of bonus depreciation. The bill extends bonus depreciation for property acquired and placed in service during 2015 through 2019 (with an additional year for certain property with a longer production period). The bonus depreciation percentage is 50 percent for property placed in service during 2015, 2016 and 2017, but then phases down to 40 percent in 2018 and 30 percent in 2019.
The bill continues to allow taxpayers to elect to accelerate the use of AMT credits in lieu of bonus depreciation under special rules for property placed in service during 2015. It modifies the AMT rules beginning in 2016 by increasing the amount of unused AMT credits that may be claimed in lieu of bonus depreciation. The bill also modifies bonus depreciation to include qualified improvement property and permit certain trees, vines and plants bearing fruit to be eligible for bonus depreciation when planted or grafted, rather than when placed in service.
Permanent extension and modification of the section 179 deduction. The bill permanently extends the small business expensing limitation and phaseout amounts in effect from 2010 to 2014 ($500,000 and $2 million, respectively). The special rules that allow expensing of computer software and qualified real property (qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property) also are permanently extended.
The bill further modifies the expensing limitation by indexing both the $500,000 and $2 million limits for inflation beginning in 2016 and by treating air conditioning and heating units placed in service in tax years beginning after 2015 as eligible for expensing. Finally, it modifies the expensing limitation with respect to qualified real property by eliminating the $250,000 cap beginning in 2016.
Moratorium on medical device excise tax. The bill provides for a two-year moratorium on the 2.3 percent excise tax imposed on the sale of medical devices so that the tax will not apply to sales during calendar years 2016 and 2017.
Reduction in S corporation built-in gains recognition period. The bill allows the corporation to only be subject to corporate-level tax on disposition of appreciated assets owned at the conversion date for five years, rather than the ten under previous law.
In addition to the items highlighted above, the PATH ACT of 2015, extends the following provisions permanently or over a five-year or two-year period:
Provisions made permanent
- 100% exclusion on Section 1202 stock
- Subpart F exception for active financing income
- 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements through 2016
- Deduction for certain expenses of elementary and secondary school teachers (with modification)
- Itemized deduction for state and local general sales taxes in lieu of state income tax
- Parity for exclusion from income for employer-provided mass transit and parking benefits
- Special rule for contributions of capital gain real property made for conservation purposes (with modification)
- Tax-free distributions from IRAs of up to $100,000
- Employer wage credit for employees who are active duty members of the uniformed services (with modifications)
- Charitable deduction for contributions of food inventory (with modifications)
Provisions extended for five years through 2019
- New Markets Tax Credit
- Work Opportunity Tax Credit
- Look-through treatment of payments between related controlled foreign corporations under foreign personal holding company rules
Certain provisions extended for two years through 2016
- Exclusion from gross income discharge of qualified principal residence indebtedness (with modification)
- Mortgage insurance premiums treated as qualified residence interest
- Above-the-line deduction for qualified tuition and related expenses
- Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico
- Empowerment zone tax incentives (with modification)
- Credit for energy-efficient new homes
- Energy-efficient commercial buildings deductions (section 179D)
- Biodiesel and renewable diesel incentives
Please contact Froehling Anderson at 952.979.3100 with any questions you may have related to the Protecting Americans from Tax Hikes (PATH) Act of 2015. .