There were several legislative changes to tax extenders in 2015. These tax provisions, commonly referred to as “tax extenders”, are reviewed annually by Congress to determine whether to re-enact. Many of these deductions and credits expired or “sunset” on December 31, 2014. In a stroke of uncommon practicality, Congress decided to re-enact the provisions – even making some of them permanent. There were many extenders to consider this year; this is a brief highlight of the major ones.
The primary changes affecting individuals came from the Protecting Americans from Tax Hikes (PATH) Act of 2015. The PATH Act made some very popular changes. First, the Enhanced Child Tax Credit was made permanent. The enhanced credit provides a $1,000 credit for each qualifying child, up to a maximum of $3,000, and is partially refundable. Another popular credit, the Enhanced Earned Income Tax Credit, was also made permanent. The amount of these credits depends on your income and the number of qualified dependents you can claim.
It also made the Enhanced American Opportunity Credit permanent. This credit provides up to $2,500 for various college expenses related to the first four years of college. Similarly, the Act extended the option to deduct college expenses as an “above-the-line” deduction through 2016. It is important to evaluate which method is better for you. This can be a difficult computation, which we are equipped to help you with.
The PATH Act also made permanent the “Above-the-Line” Deduction for Educator Expenses. This is a very popular deduction for teachers. The deduction is for up to $250 spent on various classroom supplies. Another permanent deduction is for state and local sales tax claimed by taxpayers who itemize deductions and incur sales tax expense in excess of state income tax. Not all taxpayers can utilize this, but for those who do, this can be a nice benefit.
Another tax saving opportunity made permanent is charitable contributions made directly from IRAs to qualified charities if you are over 70 ½ – up to $100,000. For many older taxpayers, this is a good option for charitable giving and may save on your tax bill.
A major win for taxpayers in the PATH Act was the exclusion from income of the amount of forgiven or discharged home mortgage debt on qualified personal residence indebtedness. This could be a huge savings for some taxpayers. Likewise, you will still be able to deduct your mortgage insurance premiums. While these two extenders were not made permanent, they were extended through 2016 so they will be around for at least a couple years.
Though not a tax extender, another change is the Achieving a Better Life Experience (ABLE) Act of 2015. This is similar to a 529 college plan (pre-tax contributions with tax-free withdrawals) only it is for people with disabilities, and instead of college expenses the savings are used for qualified medical expenses. The way these work is that anyone can contribute up to $14,000 per year to the plan. But, the beneficiary (the disabled person) can only have one account and that account can only receive up to $14,000 per year; so, these are a little limited as to funding, especially when compared to a Special Needs Trust (SNT). Also, an ABLE account has to have a Medicaid pay-back provision so that anything remaining in the account at the beneficiary’s death goes to the State – another reason to do a SNT instead. This is a little disheartening, except that at only $14,000 per year, there probably won’t be anything left anyway. If you have a family member, friend, or other loved one with a disability, be sure to discuss his or her situation and your intentions with your accountant. There are very specific rules which must be followed and they can be quite complicated.
The PATH Act made some important changes for businesses as well. The research credit was made permanent and can be used to offset other taxes starting with the 2016 tax year. This means that for eligible small businesses with tax years starting after December 31, 2015, the research credit can be used to offset Alternative Minimum Tax (AMT) and payroll taxes (FICA). Unfortunately, this is not an option for taxes being filed in 2016 since those are tax years that relate to 2015. But these entities can still use the credit to offset their income tax. The research credit can be a complicated credit to determine and requires substantial documentation.
S-Corporations (S-Corps) in particular got a major benefit from the PATH Act. If an S-Corp was once a C-Corp (a regular corporation) and still has assets with built-in gains from when it was a C-Corp, it is subject to tax at the highest corporate rate on the sale of those assets within a certain time frame. Previously the time frame was 10 years; it was reduced on a temporary basis, and it is now permanently set at only 5 years. Since the highest corporate rate is a steep 35%, this can mean huge savings for a lot of S-Corps. If you a shareholder/owner of an S-Corp and are not sure if you have built in gains, a quick look at your return should provide the answer. An evaluation of this could save you a lot of money.
Another big win for small businesses and their owners is the complete exclusion of gain on certain small business stock. Previously, only 50% of the gain was excluded and 7% was subject to AMT. The PATH Act made the exclusion 100% for both regular and AMT. Nevertheless, this exclusion only applies if the stock was acquired after September 27, 2010 but before January 1, 2015.
The PATH Act also permanently extended the Low-Income Housing tax credit at 9%, and extended the Work Opportunity Tax Credit (WOTC) through 2019. The WOTC allows employers who hire workers from certain groups to get a credit for a percentage of first and second-year wages paid to those employees. Moreover, the list of groups has been expanded to include more types of veterans and non-veterans. This can be a significant savings to employers. Also extended through 2019 was the New Markets Tax Credit.
A popular deduction for manufacturers, the Domestic Production Activities Deduction (DPAD), was extended through 2016. This is a complicated deduction and is often available to companies that engage in eligible manufacturing and production activities.
Other big wins for businesses were the Section 179 deduction and Bonus Depreciation. Section 179 allows a business to expense certain property and equipment immediately (and thereby increasing expenses and lowering taxable income) rather than capitalizing (depreciating) them over several years – a slow and complicated process. Section 179 did not go away, but its amounts were severely decreased when the extenders sunset; the PATH Act made the increased expense amounts permanent so that under Section 179 a business can deduct up to $500,000 of newly acquired property and equipment in that year so long as its total new assets for that year do not exceed $2,000,000. This is a major benefit for companies needing new equipment.
Likewise, Bonus Depreciation for the year a new asset is placed in service was extended through 2019. Bonus depreciation allows a business to depreciate an asset 50% in the first year (as opposed to amounts such as 20% or 12.5% or lower). This is another major benefit to companies adding large amounts of property and equipment.
Similarly, the capitalization safe harbor for repairs and asset purchases were increased. Many businesses were required to enact a capitalization policy stating that anything under the $500 safe harbor amount would be expensed and not capitalized. After much discussion from various sources about that being too low, the IRS agreed to increase that amount to $2,500. Accordingly, you may adopt and sign a new policy this year. Since not all businesses will want to expense that much – for example, you may want to carry the asset for banking or financing purposes you should discuss this in depth with your accountant who can explain the pros and cons of each method (expensing vs. capitalizing).
With several changes being implemented, we encourage you to contact us to determine the impact on you and planning opportunities to manage your tax situation effectively.