With the Christmas recess rapidly approaching, Congressional negotiators agreed on a tax bill in the early hours of December 16, 2015. Titled Protecting Americans from Tax Hikes (PATH) Act of 2015, President Obama signed the bill into law on December 18, 2015. The PATH Act makes various expired provisions permanent, extends a number of provisions for five years, and extends other provisions through 2016. The estimated cost for the extension of the expired tax provisions is $622 billion over the ten-year period, 2016-2025.
These provisions were made permanent (and retroactive for 2015):
• Sales tax deduction for individuals – Mainly benefits taxpayers residing in states without a state income tax, such as Florida, Texas and Washington. However, can be utilized by any taxpayer.
• Distributions from IRAs to charities for taxpayers age 70½ and older
• Sec. 179 depreciation expensing at $500,000 annually – phase-out of the deduction once eligible fixed asset additions reach $2 million. Both thresholds to be indexed for inflation beginning in 2016.
• A 15-year depreciable life for qualified leasehold improvements and qualified restaurant & retail improvement property (would have been 39 years).
• Research and development (R&D) credit with an increase in the alternative simplified credit from 14% to 20%.
• Five-year recognition period for built-in gains tax following conversion from a C to an S corporation (originally 10 years).
• Educator expense deduction of $250
• The American Opportunity Tax Credit, a $2,500 college tuition credit that had been scheduled to expire after 2017.
Bonus depreciation on acquisitions of new assets was reinstated at 50% for 2015-2017, 40% for 2018, and 30% for 2019. Whereas used property is eligible for Sec. 179 expense, bonus depreciation can only be claimed by the original owner of fixed assets. Once eligible to claim bonus depreciation, there is no income limitation. Conversely, in order to claim Sec. 179 expense, there are taxable income requirements in place that prevent businesses operating at a loss from claiming the deduction. Many states have decoupled from both the increased federal Sec. 179 expense limitation and 50% bonus depreciation.
The PATH Act also took aim at certain provisions of the Affordable Care Act, as detailed below:
1. A two-year delay from 2018 to 2020 of the excise tax on high-dollar health care plans, known as “Cadillac plans”.
2. A two-year moratorium of the 2.3% excise tax on sales of medical devices by manufacturers and importers made during calendar years 2016 and 2017. This tax has been in effect since January 1, 2013.
3. A one-year moratorium for 2017 on the health insurance provider fee.
The Act made numerous other changes affecting the child tax credit, earned income credit, transit benefits parity, work opportunity tax credit, New Markets tax credit, and various energy incentives. It also prohibits IRS employees from using personal email for official business and provides for termination of employment where employees perform, delay or fail to perform work to benefit a political purpose.
Around the same time the PATH Act was approved, a fiscal year 2016 omnibus budget bill was agreed to, which included a $290 million increase to $11.235 billion in funding for IRS operations as compared with fiscal year 2015. This is the first increase in IRS funding in several years. Congress directed the IRS to use the additional funding to make measurable improvements in customer service, as well as improve the identification and prevention of refund fraud and identity theft and enhance cyber security.
Neil Becourtney, CPA
CohnReznick LLP
