The Protecting Americans From Tax Hikes Act Of 2015
The Federal Government loves to tweak the Internal Revenue Code (“Code”) to implement its social and economic policies. Often times, the enacted tax laws will be temporary in response to a current economic condition that may exist or as an experiment to see how much GDP is boosted. One example of this tweaking was the First Time Home Buyer Credit for the 2008-2010 tax year. This provision was enacted to stimulate home buying during the recession. Other times lobbyist groups want tax breaks from Congress.
Due to the temporary nature of these laws, you end up with a confusing and unpredictable Code. However, just before recessing for the holidays, Congress passed and the President signed into law the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). The Path Act helps to give predictability to the Code as it makes many tax provisions permanent or extending them far into the future. In this article I will discuss and highlight some of the more relevant provisions of the Path Act.
Section 179 of the tax code allows small businesses to immediately deduct up to $500,000 of purchases made in a year. Since a business can get an immediate deduction, it won’t have to capitalize the purchase and deduct the cost over three, five or more years through a depreciation deduction. Prior to the PATH Act, the maximum 179 deduction was going to be only $25,000 a year.
If a business makes capital expenditures beyond $500,000, then it can take bonus depreciation. Bonus depreciation allows businesses to immediately deduct 50 percent of some investment costs. Unfortunately, the PATH Act only extends bonus depreciation until the end of 2019, rather than making it permanent.
The “Cadillac Tax” under the Affordable Care Act (Obamacare) will now be delayed until 2020. This tax levies an amount upon the most expensive employer-sponsored health insurance plans (the “Cadillac” plans). In delaying the implementation of the Cadillac Tax, Congress explains that the delay is necessary as they have found that taxpayers in lower income brackets would have been disproportionately affected than just the business executives for which the tax was designed. What I interpret this to mean is that the implementation of the Cadillac Tax will continue to be delayed until Congress has the political ability to put an adjusted gross income component to the tax so that it only affects taxpayers in the higher income tax brackets.
Shareholders of C corporations have good reason to be happy. Under the PATH Act, they can sell their shares tax free if certain conditions are met. This 100 percent exclusion allowed for gain on the sale or exchange of qualified small business stock, held for more than five years, by non-corporate taxpayers is made permanent. Even though C corporations have to pay income tax at the corporate level, unlike S corporations, at least now the stock can be sold tax free if various conditions are met.
The Work Opportunity Credit is a tax incentive program designed to encourage employers to hire and retain individuals from specific groups with employment barriers. Businesses may qualify for a tax credit of up to $9,600 per eligible employee during the first year of employment through this program. The PATH Act extends this credit until 2019.
For C corporations that elect to be treated as S corporations, the wait to avoid the built in gains tax has now been permanently reduced from ten to five years. Therefore, for purposes of computing the built in gains tax, the recognition period is the five-year period beginning with the first day of the first tax year for which the corporation was an S corporation
Taxpayers still affected by the mortgage crisis gain extra relief from recognizing the forgiveness of mortgage debt after the foreclosure of their home. The mortgage forgiveness relief has been extended to foreclosures that occur in the 2016 tax year.
The IRA Charitable Rollover is now permanent and taxpayers aged 70½ and older can donate up to $100,000 from their traditional or Roth IRAs to eligible charitable organizations without having to count such qualified charitable distributions as taxable income.
Private mortgage insurance premiums can now be deducted through the end of 2016, just as mortgage interest payments can.
The PATH Act made numerous other tax law changes that may affect your business this year. We advise that you speak to a tax attorney or certified public accountant to maximize the benefits that are available.
– Jason W. Harrel is a Partner at Calone & Harrel Law Group, LLP who concentrates his practice in all manners of Taxation, Real Estate Transactions, Corporate, Partnership and Limited Liability Company law matters. He is a certified specialist in Taxation. Mr. Harrel may be reached at 209-952-4545 or jwh@caloneandharrel.com