Much of the headline news about the Protecting Americans from Tax Hikes Act of 2015 understandably has focused on the many "extenders" provisions that now have been made permanent or extended beyond the usual two-year period found in prior tax bills.
However, Congress also made substantive modifications within many of those extenders that may be no less important. Many of these changes have only been in effect since Jan. 1, 2016, rather than reaching back to Jan. 1, 2015, the general start date for most of the extenders. This column takes a look at some of these modifications and how taxpayers might benefit from them.
SECTION 179 EXPENSING
The PATH Act makes the Sec. 179 dollar and investment limitations of $500,000 and $2 million permanent. Several beneficial modifications also have been made on top of this.
The new law provides that the Sec. 179 dollar limits are to be adjusted for inflation for tax years beginning after 2015. The amount of the inflation adjustment is based on the cost-of-living adjustment using 2014 as the base year, with rounding to the nearest multiple of $10,000. The IRS at press time had not released its official inflation-adjusted calculations. Preliminary estimates are for the $500,000 limit to remain flat in 2016 and the $2 million limitation to rise only to $2,010,000, based upon relatively low inflation between 2014 (September 2013 through August 2014) and 2015 (September 2014 through August 2015).
The Code Sec. 179 expense deduction for off-the-shelf computer software has also been made permanent. This will prove particularly useful as capital investment in IT is expected to trend upward over the next several years. In addition, the rule that allows a taxpayer to revoke a Sec. 179 expense election without IRS consent has been made permanent.
The qualified real property allowance under Code Sec. 179 has been modified and made permanent:
- For tax years beginning after 2015, the Sec. 179 expense deduction will be allowed for air conditioning and heating units; and,
- For tax years beginning after 2015, the $250,000 limitation on the amount of Sec. 179 property that can be attributable to qualified real property is eliminated, with a corresponding removal of carryforwards of disallowed amounts.
Comment: As in the past, a taxpayer will receive the greatest benefit from Code Sec. 179 over the next several years by expensing property that does not qualify for bonus depreciation (e.g., used property) and property with a long depreciation period under the modified accelerated cost recovery system.
BONUS DEPRECIATION
The additional depreciation allowance (bonus depreciation) is extended to apply to qualifying property placed in service before Jan. 1, 2020 (or before Jan. 1, 2021, in the case of certain non-commercial aircraft and property with a longer production period). The bonus rate is reduced from 50 percent to 40 for property placed in service in 2018, and to 30 percent for property placed in service in 2019. Bonus depreciation claimed during the extension period is provided long-term accounting method relief.
Effective for property placed in service after 2015, the bonus deduction for qualified leasehold improvement property is replaced with a bonus deduction for "qualified improvement property" made to the interior portion of a non-residential building. In general, qualified improvement property is defined similarly as qualified leasehold improvement property except that the interior improvements do not need to be made pursuant to a lease.
The bonus depreciation deduction for trees and vines that bear fruit or nuts and plants with a pre-productive period of more than two years is replaced with a 50 percent deduction which may be claimed in the tax year that the tree, vine or plant is planted or grafted, rather than the tax year that it is placed in service, effective for plantings and graftings after Dec. 31, 2015.
The PATH Act also reduces the $8,000 increased limitation on passenger automobile bonus depreciation to $6,400 for those placed in service in 2018 and to $4,800 for those placed in service in 2019. Unlike earlier proposals, however, none of these amounts will be adjusted for inflation.
RESEARCH CREDIT
The R&D Credit is permanently extended and may now reduce Alternative Minimum Tax liability. An allowance of the R&D Credit against AMT liability applies to credits determined for tax years beginning after Dec. 31, 2015. A new payroll tax credit, aimed at smaller start-ups, among others, applies to tax years beginning after Dec. 31, 2015.
- Research credit allowed against the AMT. The research credit is added to the list of general business credit components designated as "specified credits" that may offset AMT as well as regular tax, effective for tax years beginning after Dec. 31, 2015 (Sec. 38(c)(4), as amended by the PATH Act).
- Payroll tax credit for research expenditures. A taxpayer that is a qualified small business may elect to apply a portion of its research credit against the 6.2 percent payroll tax imposed on the employer's wage payments to employees. The credit that may be applied against the payroll tax is limited to the lesser of the research credit for the tax year; $250,000; or the amount of the business credit for the tax year, including the research credit that may be carried forward to the tax year immediately after the election year.
A partnership or corporation (including an S corporation) is a qualified small business during a tax year if its gross receipts are less than $5 million and the partnership or corporation did not have gross receipts in any tax year preceding the five-tax-year period that ends with the tax year of the election.
EMPLOYMENT-RELATED CREDITS
- Work Opportunity Credit. The WOC is extended five years through Dec. 31, 2019. In addition, it is expanded and available to employers who hire individuals who are qualified long-term unemployment recipients who begin work for the employer after Dec. 31, 2015. Qualifying employees include individuals who have been certified by the designated local agency as being in a period of unemployment of 27 weeks or more, which includes a period in which the individual received unemployment compensation under state or federal law. For wages paid to such an individual, employers are eligible for a 40 percent credit on the first $6,000, for a maximum credit of $2,400 per eligible employee.
- Activated military reservists. The employer tax credit for differential wage payments made to qualified employees on active military duty has been made permanent and applies to payments made after Dec. 31, 2014. In addition, the credit is also no longer limited to eligible small-business employers with fewer than 50 employees. Effective for tax years beginning after Dec. 31, 2015, the credit may be claimed by all employers regardless of the average number of individuals employed during the tax year.
OTHER BUSINESS-RELATED MODS
- Energy-efficient commercial property. The PATH Act extends the deduction for energy-efficient commercial building property for two years, making it available for qualified property placed into service before Jan. 1, 2017. Within that provision, slight modifications have been made to update the building and efficiency standards. The updated standards also apply to the minimum requirements for interior lighting systems.
- Film/TV/live theater. The special expensing provision for qualified film and television productions under Code Sec. 181(g) is extended for two years to apply to qualified film and television productions commencing before Jan. 1, 2017. That expensing rule is also expanded to apply to qualified live theatrical productions commencing after Dec. 31, 2015, and before Jan. 1, 2017.
- Independent oil refiners. In calculating its oil-related qualified production activities income for purposes of the Code Sec. 199 domestic production activities deduction, an independent oil refiner is now allowed to reduce its domestic production gross receipts by only 25 percent of the transportation costs that would normally be deducted from DPGR. This Appropriations Act change effectively increases their DPAD, applicable to tax years beginning after Dec. 31, 2015, and before Jan. 1, 2022.
- Empowerment zone tax benefits. The tax benefits available to certain businesses and employers operating in financially distressed empowerment zones have been extended for two years. In addition, amendments encourage businesses to hire more employees from distressed census tracts. The provision regarding the special rule for the employee residence test in the context of tax-exempt enterprise zone facility bonds applies to bonds issued after Dec. 31, 2015.
- Business property on Indian reservations. The incentives pertaining to depreciation of qualified Indian reservation property are extended two years to apply to property placed in service on or before Dec. 31, 2016. Also, for tax years beginning after Dec. 31, 2015, an irrevocable election to not apply accelerated depreciation rules to particular classes of property is available.
MODS AFFECTING INDIVIDUALS
- Classroom expenses deduction. The $250 above-the-line deduction for teacher classroom expenses has been made permanent. Also, effective starting in 2016 the $250 limit is adjusted for inflation, and expenses for professional development are added to the list of eligible expenses. These changes are made based on the calendar year, rather than the school year. The expanded scope of eligible expenses includes those for professional development courses related to the curriculum in which the teacher provides instruction, or to the students for which the educator provides instruction. The inflation adjustment calls for an increase in an amount equal to $250 multiplied by the cost-of-living adjustment determined using 2014 as the base year, with rounding to the nearest multiple of $50. Therefore, with inflation being low, an adjustment to $300 is not likely at least for several more years.
- Mass transit parity. The PATH Act reinstates parity in the exclusion for combined employer-provided transit pass and vanpool benefits and for employer-provided parking benefits. For the extension to be effective retroactive to Jan. 1, 2015, expenses incurred for months beginning after Dec. 31, 2014, and before enactment (Dec. 18, 2015) by an employee for employer-provided vanpool and transit benefits may be reimbursed (under a bona fide reimbursement arrangement) by employers on a tax-free basis to the extent they exceed $130 per month and are no more than $250 per month.
- Mortgage discharge exclusion. The PATH Act provision extends for two additional years (through Dec. 31, 2016) the exclusion from gross income for discharges of qualified principal residence indebtedness. It also provides for some relief from the normal deadline for those with a binding discharge agreement in place. The exclusion will extend to taxpayers whose qualified principal residence indebtedness is discharged on or after Jan. 1, 2017, if the discharge was pursuant to a binding written agreement entered into prior to Jan. 1, 2017. The provision relating to discharges pursuant to a binding written agreement applies to discharges of indebtedness after Dec. 31, 2015.
- Child Tax Credit. The reduced earned income threshold amount of $3,000 for determining the refundable portion of the child tax credit has been made permanent. To prevent improper claims, additional criteria must be satisfied to be able to claim the credit, and a due diligence requirement, with penalties, has been added, effective starting in 2016.
- Earned Income Tax Credit. The enhanced EITC and phase-out percentages have been made permanent. The phase-out amount to reduce the marriage penalty and subjecting this amount to inflation adjustment have also been made permanent. To enhance the prevention of improper and fraudulent claims, additional criteria must be satisfied to be able claim the credit, and additional penalties have been imposed for making improper or fraudulent claims. The amendment to this provision that makes any entry on a return claiming the EITC for which the taxpayer has been disallowed improper applies to years beginning after Dec. 31, 2015
- Nonbusiness energy property credit. The nonrefundable credit allowed to individuals under Sec. 25C has been extended for two years, making it available for qualified energy improvements and property placed in service before Jan. 1, 2017. For property placed in service after Dec. 31, 2015, the standards for energy-efficient building envelope components are modified to meet new conservation criteria.
CHARITABLE CONTRIBUTIONS
- Charitable contributions of food inventory. The enhanced deduction for charitable contributions of food inventory from corporate and non-corporate taxpayers has been made permanent and applies to contributions made after Dec. 31, 2014. For tax years beginning after Dec. 31, 2015, the corporate percentage limitations have been increased, and clarifications have been made to rules concerning carryovers, coordination with general charitable contribution rules, and presumptions concerning the tax basis and fair market value of donated food inventory.
- Native corporations. The increased deduction limits and enhanced carryforward rules applicable for charitable contributions of real property for conservation purposes (qualified conservation contributions) have been made permanent, and made available to native corporations under the Alaska Native Claims Settlement Act applicable to land conveyed under Alaska the Native Claims Settlement Act in tax years beginning after Dec. 31, 2015.
- Agricultural research organizations. Individuals may claim a maximum 50 percent charitable deduction for contributions to certain agricultural research organizations. Further, certain agricultural research organizations are allowed to elect the expenditure test to determine the permissible level of their lobbying activities for tax-exempt status purposes. These changes are applicable to contributions made on and after Dec. 18, 2015, the date of enactment.
CONCLUSION
Most extender provisions in prior years were just that: straight extensions of certain tax benefits with no further changes. Many of the provisions in the recent PATH Act break that mold, not only in terms of enabling long-range planning but also in connection with the modifications made. Since many of these are effective starting in 2016, most practitioners might at least take a look now at how they may impact clients.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at Wolters Kluwer, Tax and Accounting US.
