In mid-December, along with a $1.1 trillion spending deal, Congress passed and the President signed the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), a robust tax extenders package. The Act renews more than 50 tax subsidies – 19 permanently – and is intended to provide support to both individuals and businesses.

The Act, which is estimated to cut taxes by more than $650 billion over 10 years, has been lauded not just for its tax credits, but for the sense of stability it offers, as provisions that have expired on a yearly basis have now been extended permanently or at least beyond 2016 (the now-permanent provisions account for $560 billion of the tax cuts). With careful tax planning, individuals and businesses can now better prepare for the year ahead.

Business Tax Provisions

Among the most notable aspects of the legislation for businesses is the permanent extension and expansion of the R&D Tax Credit and the Section 179 Tax Deduction.

The R&D Tax Credit allows a business to claim a research credit equal to 20% of the amount by which the business’ qualified research expenses for a taxable year exceed its base amount for that year, thereby creating an incentive for businesses to spend money on researching and developing new products and technology. For the first time, the Act also allows smaller businesses to take advantage of the credit by permitting those with less than $50 million in gross receipts to claim the credit against their Alternative Minimum Tax and those with less than $5 million in gross receipts to claim the credit against their payroll taxes (up to $250,000 per year for up to five years).

The Section 179 Tax Deduction allows businesses of all sizes to deduct investments in computer software and qualified leasehold, retail and restaurant improvements rather than depreciating the cost over a number of years, and the Act raises the current expensing limitation from $25,000 to $500,000 and the phase-out amount from $200,000 to $2 million. The Act also extends through 2019 bonus depreciation for property acquired and placed in service in 2015 through 2019. The bonus depreciation percentage is 50% for property placed in service in 2015, 2016 and 2017, 40% in 2018, and 30% in 2019.

Because the extensions of the business tax credits retroactively include amounts paid or incurred after December 31, 2014, businesses that have filed returns for tax years ending after December 31, 2014 (such as fiscal year corporations) should consider filing an amended return to claim the tax credits.

In addition, the Act makes permanent a provision that allows retailers and restaurants to depreciate remodeling and other improvements over 15 years rather than the previous standard of 39 years.

The Act also permanently extends the provision allowing a taxpayer who sells qualifying small business stock held for more than five years to exclude 100% of the gain, as well as the provision allowing an S corporation to hold its assets for only five years (rather than 10 years) following conversion from a C corporation to avoid the tax on built-in gains.

Finally, the Act postpones the 2.3% excise tax to be assessed on medical devices in 2016 and 2017 under the Affordable Care Act, as well as delays the “Cadillac Tax” on high-cost employer-sponsored health plans from 2018 to 2020.

Individual Tax Provisions

Individuals may benefit from the Act through the Child Tax Credit, the American Opportunity Tax Credit (the Hope Scholarship Credit), and the Earned Income Tax Credit, among others, all of which have been made permanent.

The Child Tax Credit allows a taxpayer to claim a tax credit of $1,000 for each child under 17 who the taxpayer can claim as a dependent, although the credit is phased out for higher earning parents. The credit is reduced by $50 for each $1,000 of modified adjusted gross income over $75,000 for single individuals or heads of household, $110,000 for married couples filing jointly, and $55,000 for married individuals filing separately. For parents with three or more qualifying children, the “alternative formula” (the amount by which the taxpayer’s social security taxes exceed the taxpayer’s earned income tax credit) may be used if the alternative yields a higher tax credit.

The Hope Scholarship is a credit for various tuition and related post-secondary education expenses. The Act not only makes the Hope Scholarship permanent, it increases the credit from $1,800 for the first two years of post-secondary education to $2,500 for the first four years of post-secondary education, and it raises the phase out amounts from $48,000 (single) and $96,000 (married) to $80,000 and $160,000, respectively.

The Earned Income Tax Credit (EITC), a credit for low and moderate-income workers based on income, filing status, number of children and work status, was also permanently extended under the Act. The EITC amount was increased to 45% for those with three or more children, and the EITC marriage penalty was reduced by increasing the income phase-out range by $5,000, indexed for inflation, for those who are married and filing jointly.

Additionally, the Act not only makes permanent the above-the-line deduction (up to $250) for the eligible expenses of elementary and secondary school teachers, it also indexes the deduction for inflation and adds professional development expenses as an eligible expense. The Act also permanently extends a provision allowing qualified parking benefits to be excluded from an employee’s wages for payroll tax purposes and from gross income for income tax purposes.

Charitable Contributions

For individuals interested in making a charitable contribution, the Act permanently extends the charitable deductions for contributions of real property for conservation purposes. In addition, it extends the ability of individuals at least age 70 ½ to exclude from gross income qualified charitable contributions from IRAs (up to $100,000/year) and the provision providing that a shareholder’s basis in S corporation stock is reduced by the shareholder’s pro rata share of the adjusted basis of property contributed by the S corporation for charitable purposes.

Conclusion

The Act certainly brings an element of stability for individuals and businesses, and careful tax planning can help you take advantage of the tax-saving opportunities the Act offers. For more information on the Act or how it can benefit you or your business, please contact a member of Dinsmore’s Taxation team.