uncle-sam-240px-497491025This past holiday seasontaxpayers received a “gift” from Washington, D.C. It’s the PATH Act, which stands for Protecting Americans from Tax Hikes Act of 2015. This act does more than just extend expired tax provisions for another year, the bipartisan deal also makes about one-third of these tax provisions permanent, and many others have been extended for periods ranging from two to five years. Some of these provisions may produce significant savings for taxpayers on their 2015 income tax returns.

Which Tax Breaks Are Now Permanent for Businesses?

For business taxpayers, major provisions that were permanently and retroactively reinstated by the PATH Act include:

Research credit. This credit equals the sum of:

  1. The university basic research credit, which is generally 20% of the basic research payments, and
  2. 20% of the excess (if any) of the qualified research expenses for the tax year over a base amount (unless the taxpayer elected an alternative simplified research credit),
  3. 20% of the taxpayer’s expenditures on qualified energy research undertaken by an energy research consortium.

Important note: There are many additional rules attached to the research credit. Ask your tax adviser about filing an amended return if your Maine business has already filed returns for a fiscal year that includes part of 2015. This allows you to claim a refund for the amount of any additional tax paid because of not previously claiming amounts that are now eligible for the research credit.

For tax years that began after December 31, 2015, small start-up businesses with less than $5 million of gross receipts may claim up to $250,000 per year of the credit against their employer FICA tax liability. Also, eligible small businesses with $50 million or less of gross receipts may claim this credit against their alternative minimum tax liability.

Increased Section 179 expensing election. The new law for 2015 revives the increased Sec. 179 expensing limit for qualifying fixed assets and phaseout threshold to $500,000 and $2 million, respectively. Under the previous rules, these amounts were set at $25,000 and $200,000, respectively, for tax years beginning after 2014.

Both of these amounts will be indexed for inflation beginning in 2016. The special rules that allow expensing for computer software have also been permanently extended, as well as the rules for expensing qualified real property.

In addition, the new law permanently allows companies to use 15-year straight-line cost recovery for qualified retail improvements, leasehold improvements, and qualified restaurant buildings and improvements.

Reduction in S corporation recognition period for built-in gains tax. An S corporation generally isn’t subject to tax, but instead passes through its income to its shareholders, who pay tax on their pro-rata shares of the company’s income. When a C corporation elects to become an S corporation (or when an S corporation receives property from a C corporation in a nontaxable carryover basis transfer), the S corporation is taxed at the highest corporate rate (currently 35%) on all gains that were built-in at the time of the election if the gain is recognized during a “recognition period.”

This recognition period, under the new law, is five years (instead of the generally applicable 10-year period), and it begins with the first day of the first tax year for which the corporation was an S corporation (or beginning with the date of acquisition of assets if the rules applicable to assets acquired from a C corporation applied). If an S corporation disposes of assets in a tax year beginning in 2012 (or after) and the disposition occurred more than five years after the first day of the relevant recognition period, the gain or loss on the disposition won’t be taken into account in determining the net recognized built-in gain.

Exclusion of gains on certain small business stock. Taxpayers are now allowed to exclude all of the gain on the disposition of qualified small business stock acquired after September 27, 2010, and none of the excluded gain is subject to the alternative minimum tax.

Important note: You must hold the shares for more than five years to be eligible for this tax break, and companies must meet the definition of a qualified small business corporation.

Other common business tax breaks that were made permanent under the new law include:

  • Basis adjustment to stock of S corporations making charitable contributions of property,
  • Employer wage credit for employees who are active duty members of the uniformed services,
  • Military housing allowance exclusion for determining whether a tenant in certain counties is low-income,
  • 9% minimum low-income housing tax credit rates for non-federally subsidized buildings,
  • Regulated investment company qualified investment entity treatment under the Foreign Investment in Real Property Tax Act,
  • Enhanced charitable deduction for contributions of food inventory, and
  • Subpart F exception for active financing income of the U.S. parent of a foreign subsidiary.

Which Tax Breaks Are Now Permanent for Individuals?

Major tax provisions made permanent by the PATH Act (some with modifications) that may help you save taxes include:

Enhanced American Opportunity credit. This credit offers up to $2,500 per year for the first four years of post-secondary education, which the new law has now made permanent. It phases out for adjusted gross income (AGI) starting at $80,000 (if single) and $160,000 (if married filing jointly).

Educator expense deductions. Secondary and elementary school teachers who qualify can claim up to $250 per year, an above-the-line deduction, for expenses paid or incurred for certain supplies, books, computer equipment, and supplementary classroom materials. Beginning in 2016, the new law indexed the deduction for inflation and includes professional development expenses.

The PATH Act also includes provisions that permanently and retroactively allow individual taxpayers to:

  • Deduct state and local general sales taxes in lieu of deducting state and local income taxes,
  • Take tax-free distributions from IRAs for charitable purposes, and
  • Apply a special rule for contributions of capital gains real property made for conservation purposes.

The enhanced child credit was also made permanent and calls for “program integrity” and other safeguards to reduce improper payments under the child credit and American Opportunity credit programs.

Which Tax Provisions Have Been Temporarily Extended?

Several major business-related provisions have been extended through 2019, such as:

First-year bonus depreciation. The PATH Act continues to allow taxpayers to elect to accelerate the use of alternative minimum tax (AMT) credits in lieu of bonus depreciation under special rules for 2015. But beginning in the 2016 tax year, it would increase the amount of unused AMT credits that may be claimed in lieu of bonus depreciation. In general, for new property purchased and put in service this tax year through tax years starting in 2017, the first-year bonus depreciation percentage is 50%, and then it decreases to 40% in 2018 and 30% in 2019.

Expanded Work Opportunity credit. This credit allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of first-year wages up to $6,000 per employee ($3,000 for qualified summer youth employees). If the employee is a long-term family assistance recipient, this credit is a percentage of first and second year wages, up to $10,000 per employee. Generally, the percentage of qualifying wages is 40% of first-year wages. However, it’s 25% for employees who have completed at least 120 hours, but less than 400 hours of service for the employer. For long-term family assistance recipients, it includes an additional 50% of qualified second-year wages.

The maximum wages that can be used to calculate the credit for hiring a qualifying veteran generally is $6,000. However, it can be as high as $12,000, $14,000 or $24,000, depending on factors such as whether the veteran has a service-connected disability, the period of his or her unemployment before being hired, and when that period of unemployment occurred relative to the credit-eligible hiring date.

The new law retroactively extends this credit to eligible veterans and non-veterans who begin work for the employer before January 1, 2019. With respect to individuals who begin work for an employer after December 31, 2015, this credit also applies to employers who hire qualified long-term unemployed individuals, who have been unemployed for 27 weeks or more. The credit with respect to such long-term unemployed individuals is 40% of the first $6,000 of wages.

Other business tax breaks that have been temporarily extended through 2019 include: 1) the look-through rule for payments between related controlled foreign corporations under foreign personal holding company income rules, and 2) the New Markets credit for qualified equity investments to acquire stock in a community development entity.

Below are the miscellaneous business tax provisions extended only through 2016:

  • Domestic production activities deduction for Puerto Rico,
  • Qualified zone academy bond limitation,
  • Empowerment Zone tax breaks for certain economically depressed areas,
  • Employment credit for certain Indian tribe members and their spouses, and
  • Various energy-efficiency tax credits.

Need More Information?

The best way to make sure you understand how the PATH Act and its changes relate to your business, is to contact your tax adviser. Many of these tax breaks are continuations from previous years, so they may seem familiar. However, do not assume you know all the details because some of the previous rules have been modified under the new law. Moreover, we’ve only highlighted some of the more common individual and business tax breaks that have been extended. For more information on more obscure tax breaks and last-minute tax planning strategies, contact your tax adviser.