On December 18, Congress approved and President Obama signed the Protecting Americans from Tax Hikes Act of 2015 (the Act) extending dozens of expired tax deductions, credits, and incentives. In addition, the Act provides for additional tax rules on a host of topics.
Here are some of the most significant provisions:
50% Bonus Depreciation: The 50% bonus depreciation provisions for qualified business property, including qualified leasehold improvements, are extended for property placed in service through December 31, 2017. Bonus depreciation is allowable in 2018 and 2019, but at a reduced rate (40% for 2018 and 30% for 2019).
Section 179 Expensing Thresholds: Section 179's increased expensing amounts are permanently reinstated. Specifically, for qualified property placed in service after December 31, 2014, the Act generally extends the increased $500,000 maximum expensing amount under §179 and the increased $2 million investment-based phaseout amount. After 2015, both of these amounts will be indexed for inflation. For qualified real property, the maximum amount that can be expensed will be $250,000 for the 2015 taxable year. After 2015, there will not be any special limitation on qualified real property. In addition, after 2015, heating and air conditioning units will qualify for §179 expensing.
15-Year Life for Qualified Leasehold Improvements: Qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property will have a 15-year depreciation recovery period. This provision is permanently reinstated.
IRA Distributions to Nonprofits: Individuals age 70 1/2 and older can make tax-free distributions of up to $100,000 per year from their individual retirement plans to charitable organizations. This provision is permanently reinstated.
S Corporation Built-in Gains Tax: The five-year holding period requirement to avoid the built-in gains tax is permanently reinstated. The holding period would otherwise have been 10 years. A similar permanent reinstatement applies to Regulated Investment Companies (RICs) and REITs that were formerly C corporations or acquired assets from a C corporation.
Energy Efficiency Deductions for Commercial Buildings: Under §179D, deductions of up to $1.80 per square foot for energy efficient commercial building property are extended for two years (i.e., for property placed in service through December 31, 2016).
R&D Tax Credit: Tax credits for qualified research activities are permanently reinstated. In addition, starting in 2016, certain small businesses are permitted to offset their Alternative Minimum Tax (AMT) liabilities and certain payroll taxes as well as their regular tax liability starting in 2016.
Hiring and Employment Credit: The Work Opportunity Tax Credit is extended for five years through 2019. In addition, the credit is expanded to cover certain employees who are long-term unemployment recipients who are hired after December 31, 2015.
Small Business Stock: The Act permanently reinstates the 100% exclusion of gain by individuals on certain small business stock. The amount of the potential exclusion is limited to $10 million. The Act also permanently eliminates the AMT tax preference for such gain.
Low-Income Housing Credit: The Act permanently reinstates the 9% minimum rate for newly constructed, non-federally subsidized buildings. Absent the change, there would have been no minimum rate for buildings placed in service after December 31, 2015.
Due Dates of Information Returns: Currently, Forms W-2 and Forms 1099 for nonemployee compensation are not due to be filed with the IRS until February 28 or March 31, if electronically filed. Under the Act, these forms will be due by January 31. The new filing date will be first effective for 2016 forms, which will be due on January 31, 2017.
Errors on Information Returns: Under current law, small errors on information returns are required to be corrected and are subject to penalties. The Act provides a de minimis threshold of $100 per statement ($25 per statement in the case of withholding). Under the Act, de minimis errors do not need to be corrected and are not subject to penalties. The de minimis rules apply to information returns furnished after December 31, 2016. This provision should significantly reduce the penalties and compliance costs of preparing information returns for many businesses.
Gift Tax Charitable Deductions: Individuals are not required to pay gift tax on donations to certain charitable organizations. There was uncertainty as to whether this exemption applies to social welfare organizations, labor and agricultural organizations, trade associations, and business leagues. The Act clarifies that such gifts are not subject to gift tax. The provision is effective for gifts made after December 18, 2015, the date of enactment of the Act. For earlier gifts, uncertainty continues as to whether the gifts are subject to gift tax.
State and Local Sales and Use Taxes: The Act allows taxpayers who itemize deductions to deduct state and local sales and use taxes instead of state and local income taxes. This provision is permanently reinstated.
Exclusion for Discharged Home Mortgage Debt: Discharge of indebtedness income from a qualified principal residence of up to $2 million ($1 million for married filing separately) can be excluded from gross income. The Act extends this exclusion for two years to apply to home mortgage debt discharged through December 31, 2016.
Mass Transit and Parking Benefits: The Act permanently reinstates parity for the monthly exclusion for employer-provided transit benefits with employer-provided parking benefits. For 2015, both are $250 per month. Had there been no extension, the exclusion for 2015 would have been $250 per month for parking and $130 per month for transit. After 2015, both the parking and transit monthly exclusion amounts be increased for inflation.
Nonbusiness Energy Property: The credits for the purchase of certain energy efficient improvements to existing homes and for energy efficient new homes are extended for two years. Taxpayers will be allowed a credit for purchases made through December 31, 2016.
Section 529 Qualified Tuition Programs: Taxpayers can now use funds contributed to 529 plans for the costs of a computer, including printers and software, and internet access. To be eligible, the computer equipment, software, and services must be primarily used by the beneficiary during the time this person is enrolled at an eligible education institution. The change applies retroactively to the 2015 taxable year.
REITS: The Act makes significant changes to the tax rules that govern the treatment of REITs. Further information on these changes will appear in a future Client Alert.
Healthcare Plans: The effective date of the so-called "Cadillac Excise Tax" on lavish employee healthcare benefits has been pushed back two years until 2020. The tax is controversial and was slated to go into effect in 2018. This provision appeared in the $1.1 trillion spending bill that was enacted on the same day as the Act.
If you have questions about these or other provisions, contact your Berdon advisor. Berdon LLP New York Accountants