The 2015 Protecting Americans from Tax Hikes (PATH) Act
The Protecting Americans from Tax Hikes (PATH) Act – the extenders component of H.R. 2029 makes permanent several lapsed business, individual, and charitable giving incentives, such as the research credit, the subpart F exception for active financing income, and tax-free IRA distributions for charitable contributions by individuals age 70-1/2 and older. It also renews a handful of provisions such as bonus depreciation, the work opportunity and new markets credits, and production and investment tax credits for wind and solar energy for five years.
1. BUSINESS EXTENDERS
1. Permanent extensions: The PATH Act permanently extends several business provisions retroactive to the end of 2014. It also modifies certain provisions prospectively.
1. Research and experimentation credit – The research credit is made permanent. For taxable years beginning after 2015, the credit is modified to allow an eligible small business to claim the credit against both its regular tax and alternative minimum tax (AMT) liabilities. Beginning in 2016, certain small businesses also may claim the credit against the employer portion of their payroll tax liability, rather than against their income tax liability.
2. Increased expensing limits under section 179 – The bill makes permanent the increased expensing limit and phase-out threshold under section 179 – $500,000 and $2 million, respectively – which most recently lapsed at the end of 2014. (Under current law, those amounts have fallen to $25,000 and $200,000, respectively). Additionally, the extenders bill permanently allows taxpayers to expense off-the-shelf computer software and qualified real property (i.e., qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) under section 179provisions that also lapsed at the end of 2014. For taxable years beginning after 2015, the bill (1) indexes the expensing limits to inflation, (2) repeals the limitation on the amount of section 179 property that can be attributable to qualified real property, and (3) adds air conditioning and heating units to the definition of qualifying property.
3. Other business provisions made permanent – The legislation also makes permanent a handful of other business incentives, including the:
- Reduced recognition period (i.e., five years rather than 10) after which S corporations can avoid built-in gains tax following conversion from C corporation status;
- 100 percent gain exclusion for Qualified Small Business Stock, including the elimination of the exclusion as an AMT preference item;
- 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
2. Long-term extensions: A handful of other business provisions receive longer-term, but not permanent, extensions. These include:
- Bonus depreciation – The PATH Act extends bonus depreciation for qualified property placed in service over the next five years (i.e., through 2019), subject to a phase-out schedule: 50 percent bonus depreciation continues for 2015, 2016, and 2017, with the percentage falling to 40 percent in 2018, and 30 percent in 2019. After 2015, the bill also allows bonus depreciation to be claimed on qualified improvement property regardless of whether the property is subject to a lease, and removes the requirement that an improvement be placed in service more than three years after the building was placed in service.
- Work opportunity tax credit – Under the PATH Act, the work opportunity tax credit (WOTC) is extended through 2019 and expanded beginning in 2016 to include as a targeted group certain long-term unemployed individuals (i.e., those certified as having been unemployed at least 27 weeks). Employers who hire individuals from this new targeted group would be eligible to receive a credit of 40 percent of the first $6,000 in wages paid.
2. CHARITABLE GIVING EXTENDERS
The PATH Act makes permanent several incentives to promote charitable giving by businesses and individuals.
1. Charitable contributions of food inventory: The legislation permanently extends the deduction for charitable contributions of food inventory and expands it by:
- Increasing the contribution limit for C corporations to 15 percent (from 10 percent) of the taxpayer’s net income for the taxable year, and increasing the limit for a taxpayer that is not a C corporation to 15 percent of the taxpayer’s aggregate net income for the taxable year from all trades or businesses from which such contributions were made for the taxable year;
- Providing a five-year carryforward for qualifying food inventory contributions that exceed the 15 percent limit; and
- Adding presumptions that certain taxpayers may use in determining the tax basis and the fair market value of donated food inventory.
- The extension generally is effective for contributions made after December 31, 2014. The expanded incentives apply for tax years beginning after December 31, 2015.
2. Other charitable giving provisions: Several other charitable giving incentives are made permanent without additional modifications. These include:
- Tax-free treatment of distributions from individual retirement plans by individuals age 70-1/2 and older for charitable purposes;
- The special rules for contributions of capital gain real property made for conservation purposes;
- The basis adjustment to stock of S corps making charitable contributions of property.
3. INDIVIDUAL EXTENDERS
- Among the items in the PATH Act targeted at individual taxpayers is a provision that permanently extends the deduction for state and local sales taxes in lieu of a deduction for state and local income taxes. This is of particular interest to itemizers in states that do not impose an income tax.
- The PATH Act also makes permanent enhancements to the earned income tax credit and child tax credit that were enacted in the American Recovery and Reinvestment Act of 2009 and scheduled to expire in 2017.
- Notable among the items extended for 2015 and 2016 is one provision that allows individuals to exclude from income for tax purposes the debt forgiven by a bank on the short sale or foreclosure of a home and another that treats private mortgage insurance premiums as deductible interest payments.
Changes to implementation of PPACA taxes
Both the PATH Act and the omnibus appropriations components of H.R. 2029 include provisions that suspend or delay implementation of certain PPACA taxes:
- Medical device excise tax – The medical device excise tax is suspended for sales in 2016 and 2017 (included in the PATH Act).
- Cadillac tax – Implementation of the so-called “Cadillac” tax on high-cost employer provided health insurance plans is delayed for two years, until 2020 (included in the omnibus appropriations section).
- Annual fee on health insurance providers – This fee is suspended for 2017 (also included in the omnibus appropriations section).
Section 529 plan changes
The PATH Act includes a non-extender provision that liberalizes the rules for section 529 education savings plans by:
- Expanding the definition of qualified higher education expenses to include computer equipment and technology;
- Simplifying the treatment of distributions for individuals with multiple section 529 accounts; and
- Treating as a qualified expense any recontribution of tuition refunds if the recontribution is made within 60 days.
- These changes generally take effect for distributions made or refunds after December 31, 2014.