The 2015 PATH Act

Kristina Stamatis, The Daily Record Newswire

On Dec. 18 President Barack Obama signed the PATH Act, which made permanent more than 20 key tax provisions while extending others for either two or five years.

The key provisions for businesses that have been made permanent are enhanced section 179 expensing, the research and development tax credit, 100 percent gain exclusion on qualified small business stock and the reduced recognition period for S-corporation built in gains tax.

Section 179: Pre-act, the dollar limit for Code Sec. 179 expensing for 2015 had reverted to $25,000 with an investment limit of $200,000. The Act permanently sets the Code Sec. 179 expensing limit at $500,000 with a $2,000,000 overall investment limit before phase out. These amounts will be indexed for inflation beginning in 2016.

Research & Development tax credit: The credit is available to businesses with qualified research and development expenditures. This provision has historically been extended annually, which has not allowed for effective strategic planning.

100 percent% gain exclusion on qualified small business stock: The provision excluding 100 percent of the gain realized on the sale or exchange of qualified small business stock held for more than five years has been made permanent. This incentive has proven valuable in funding start-ups.

Recognition period for S-corporation built in gains tax: The act makes permanent the five year recognition period for built-in gain following conversion from a C to an S corporation. The recognition period was previously 10 years.

Business provisions extended for five years include the Work Opportunity Tax Credit (WOTC) and bonus depreciation. Bonus depreciation will be phased out through 2019 with 50 percent being allowed for 2015-2017, 40 percent in 2018 and 30 percent in 2019. In addition, the election to accelerate the use of AMT credits in lieu of bonus depreciation continues to be
available. Bonus depreciation has also been modified to include qualified improvement property.

The key provisions that have been made permanent for individuals include:

• The election to claim an itemized deduction for state and local sales taxes in lieu of deducting state and local income taxes. Typically this election would benefit those in states without an income tax or those who have made a big-ticket purchase, such as a car or boat.

• The American opportunity tax credit (AOTC). This education credit of up to $2,500 was slated to return to $1,800 with lower phase-outs in 2017. The act makes the enhanced credit of $2,500 permanent.

• The enhanced child tax credit, allowing a credit of $1,000 per qualifying child, has been made permanent, as has the refundable portion of the credit, which is equal to 15 percent of earned income in excess of $3,000. Under previous law this threshold would have reverted back to $10,000 in 2017.

• The earned income tax credit, which is enhanced with an increase of $5,000 in phase-out and the increased 45 percent credit percentage applicable to taxpayers with three or more qualifying children has been made permanent.

• The provision that allows for individuals age 70½ and older to make a tax free distribution of up to $100,000 annually from their individual retirement account (IRA) has been made permanent.

• The above-the-line deduction for teachers’ classroom expenses of $250 has been made permanent, will be indexed for inflation beginning in 2016 and has been broadened to include professional development expenses.

• Individual provisions extended two years include the above-the-line deduction for qualified tuition and fees for secondary education of up to $4,000 and the mortgage debt exclusion. The mortgage debt exclusion allows for an exclusion from income of cancellation of mortgage debt on a principal residence of up to $2 million. Also extended for individuals is the $500 credit for the purchase of certain nonbusiness energy property.

The provisions impacted by the Omnibus and the act related to the Affordable Care Act are the “Cadillac Tax” and the ACA excise tax on qualified medical devices. The act has delayed for two years the ACA excise tax on high dollar health care plans, known as Cadillac plans. The excise tax had been scheduled to apply to tax years beginning after Dec. 31, 2017. The act also imposes a two-year moratorium on the ACA excise tax on qualified medical devices. The tax will not apply to sales during calendar years 2016 and 2017.

The act also contains several non-extender provisions related to tax administration and the security of data.

The cost of the PATH Act is estimated at approximately $700 billion over 10 years. This is a hefty price tag with very little in the way of revenue measures. This act is considered the first step in a pro-growth tax reform that eliminates the days of extending tax policies one year at a time.

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Kristina S. Stamatis, CPA is a senior manager with Mengel, Metzger, Barr & Co. LLP, and can be reached at Kstamatis@mmb-co.com.