On December 18, President Obama signed H.R. 2029, the tax (the “Protecting Americans from Tax Hikes Act of 2015”) and spending bills (Consolidated Appropriations Act, 2016) to fund the government for its 2016 fiscal year. The tax portion includes a two-year delay on taxing high-cost “Cadillac” health plans, as well extensions to several renewable energy credits and a tax break for oil refiners, with tax extenders language making permanent or extending dozens of expired business and household tax breaks. Below is a summary of the tax provisions contained in the overall enacted legislation.
Tax Relief For Families and Individuals
Enhanced child tax credit made permanent – The Act permanently extends the threshhold for determining the portion of the child tax credit that is refundable (15% of earned income above a set amount) at $3,000. The dollar amount will not be indexed for inflation. Effective for taxable years beginning after the date of enactment (December 18, 2015).
Enhanced American Opportunity Tax Credit made permanent – The Act makes the American Opportunity Tax credit permanent (increased dollar amounts and phaseouts over the Hope Scholarship credit). A corresponding amendment is made to 2009 ARRA, §1004(c)(1) regarding mirror Code provisions. Effective for taxable years beginning after the date of enactment (December 18, 2015).
Extension of deduction of state and local general sales taxes – The Act permanently extends the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes. Effective for taxable years beginning after December 31, 2014.
Incentives for Charitable Giving
Extension of tax-free distributions from individual retirement plans for charitable purposes – The Pension Protection Act of 2006 provided an exclusion from gross income for qualified charitable distributions up to $100,000 made by individuals at least 70 1/2 years of age from a traditional IRA or Roth IRA. The period of exclusion originally applied to such distributions in taxable years 2006 and 2007, and was subsequently extended to apply to distributions in taxable years 2008 through 2014. The Act makes the exclusion permanent. Effective for distributions made in taxable years beginning after December 31, 2014.
Extension of basis adjustment to stock of S corporations making charitable contributions of property – The Act permanently extends the provision allowing S corporation shareholders to take into account their pro rata share of charitable deductions even if such deductions exceeds such shareholder’s adjusted basis in the S corporation. Effective for contributions made in taxable years beginning after December 31, 2014.
Incentives for Growth, Jobs, Investment and Innovation
Extension and modification of research credit – The Act makes permanent the research credit. The Act also permits a small business ($50 million or less in gross receipts) to claim the credit against alternative minimum tax (AMT). Certain small business start-up companies are permitted to claim the credit against payroll tax. Generally effective for amounts paid or incurred after December 31, 2014; AMT and start-up provisions effective for taxable years beginning after December 31, 2015.
Extension of 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements – The Act permanently extends the special 15-year cost recovery period for certain leasehold improvements, restaurant buildings and improvements, and retail improvements. Effective for property placed in service after December 31, 2014.
Extension and modification of increased expensing limitations and treatment of certain real property as section 179 property – The Act makes permanent the higher small business expensing limitation and phase-out amounts ($500,000 and $2 million). Without this change, the amounts would have been $25,000 and $200,000, respectively, for tax years beginning after 2014. These amounts are indexed for inflation beginning in 2016. The special rules that allow expensing for computer software, qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property are permanently extended. Additionally, the Act permits expensing for air conditioning and heating units placed in service after 2015. Generally effective for taxable years beginning after December 31, 2014; air conditioning and heating unit provision effective for taxable years beginning after December 31, 2015.
Extension of exclusion of 100 percent of gain on certain small business stock – The Act permanently extends the exclusion of 100% of the gain on certain small business stock for non-corporate taxpayers to stock acquired after September 27, 2010, and held for more than five years. This provision also extends the rule that eliminates such gain as an AMT preference item. Effective for stock acquired after December 31, 2014.
Extension of reduction in S-corporation recognition period for built-in gains Tax – For S corporations, the built-in gains tax was added in conjunction with the 1986 TRA repeal of the General Utilities doctrine. Congress was concerned that shareholders of closely held C corporations could circumvent a corporate-level tax by converting to S status and liquidating the corporation or selling appreciated assets and then distributing the proceeds. To prevent circumvention of the two-tier tax, §1374 was added to the Code to impose a corporate-level tax on the “built-in gain” recognized by former C corporations during the first 10 years of S existence (the “recognition period”). Legislation reduced the recognition period for taxable years beginning in 2009 through 2014. The Act permanently reduces the recognition period to five years for taxable years beginning in 2015 and thereafter. Pre-existing installment sales continue to be governed by the holding periods for the years of sale. Effective for taxable years beginning after December 31, 2014.
Extensions Through 2019
Extension of New Markets Tax Credit – The Act extends through 2019 the $3.5 million tax yearly credit limitation for the New Markets Tax Credit. The carryover of any unused limitation is extended through 2024. Effective for calendar years beginning after December 31, 2014.
Extension and modification of bonus depreciation – The Act extends bonus depreciation to property acquired and placed in service through 2019 (2020 for certain property with a longer production period). The bonus depreciation percentage is 50% for property placed in service during 2015, 2016 and 2017 and decrease to 40% in 2018 and 30 percent in 2019. The Act continues to allow taxpayers to elect to accelerate the use of prior year minimum tax credits in lieu of bonus depreciation under special rules for property placed in service during 2015.
Beginning in 2016, the Act modifies the minimum tax credit rules by increasing the amount of unused minimum tax credits that may be claimed in lieu of bonus depreciation. The Act reduces the bonus depreciation amounts for passenger automobiles placed in service to $6,400 during 2018 and $4,800 during 2019. The Act also provides an election to modify bonus depreciation to include certain trees, vines, and plants bearing fruit or nuts to be eligible for bonus depreciation when planted or grafted, rather than when placed in service. Generally effective for property placed in service after December 31, 2014, in taxable years ending after that date. However, other provisions, including expansion of the minimum tax acceleration election and the special rules for plants, are generally effective for taxable years beginning after December 31, 2015.
Extensions Through 2016
Extension and modification of exclusion from gross income of discharge of qualified principal residence indebtedness – The Act extends through 2016 the exclusion from gross income of a discharge of qualified principal residence indebtedness. The Act also provides that mortgage debt discharged is eligible for exclusion as long as it was pursuant to an arrangement entered into and evidenced in writing before January 1, 2017. Effective for discharges of indebtedness after December 31, 2014.
Extension of mortgage insurance premiums treated as qualified residence
interest – The Act extends through 2016 the treatment of qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction, subject to the existing phaseout rules. Effective for amounts paid or accrued after December 31, 2014.
Extension of above-the-line deduction for qualified tuition and related
expenses – The Act extends through 2016 the above-the-line tax deduction for qualified education expenses. The deduction is capped at $4,000 for an individual whose adjusted gross income (AGI) does not exceed $65,000 ($130,000 for joint filers) or $2,000 for an individual whose AGI does not exceed $80,000 ($160,000 for joint filers). Effective for taxable years beginning after December 31, 2014.
Other Tax-Related Provisions
Delay of excise tax on high-cost, employer-sponsored health coverage – The Act provides for a two-year delay of the excise tax on high-cost employer-sponsored health coverage (also known as the “Cadillac” tax); thus, the tax is effective in 2020 rather than 2018.
Deductibility of excise tax on high-cost employer-sponsored health coverage – The Act permits the excise tax on high-cost employer-sponsored health coverage to be deductible as a business expense, in accordance with the general rule for excise taxes.
These are just some of the year-end steps that can be taken to save taxes. Please contact us at any of our offices if you would like to discuss in more detail, or to tailor a plan that will work best for you.