Congress Passes Tax Extenders Bill; Business and Individual Provisions Reinstated

December 18, 2015

Congress has approved the long-awaited tax extenders bill and is now awaiting President Obama to sign the Protecting Americans from Tax Hikes Act of 2015 (“the Act”) into law. Most provisions of the Act are retroactive to January 1, 2015, and makes many perennially extended provisions permanent and provides temporary tax relief for most other expiring provisions.

Highlights on some of the more significant business and individual extenders include:

Business Tax Extender Highlights

• Bonus depreciation – Bonus depreciation is extended to property acquired and placed in service before 2020. The bonus depreciation percentage is 50 percent for property placed in service during the years 2015, 2016, and 2017. The percentage phases down to 40 percent in 2018 and 30 percent in 2019. New assets with a tax life of 20 years or less qualify for the special depreciation allowance. For example, if you purchase a machine for $100,000, you would be able to deduct $50,000 under bonus depreciation – or half of the cost of the machine immediately as depreciation expense; the remaining $50,000 will be depreciated over the life of the machine.
• Increase in Section 179 expense – The Section 179 deduction has been permanently restored to 2014 amounts. The maximum Section 179 expense deduction is $500,000; however, this limit is reduced by the cost of Section 179 property exceeding $2 million. After 2015 these amounts will be indexed for inflation. This allows taxpayers to deduct some or all of the cost of certain qualifying property.
• 15 year life for leasehold improvements – This provision has been made permanent. Qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property can be depreciated over 15 years under the Modified Accelerated Cost Recovery System (MACRS). Only qualified leasehold improvements are eligible for bonus depreciation; however, all three qualify for Section 179.
• Research credit – This credit is now permanent. The Research and Development tax credit allows taxpayers a 20 percent credit for qualified research expenses or a 14 percent alternative simplified credit. The credit can be advantageous for businesses that develop, design or improve products, techniques, software and similar activities. And beginning in 2016, eligible small businesses with $50 million or less in gross receipts may claim the credit against alternative minimum tax liability, and the credit can be utilized by certain small start-up businesses against the employer’s payroll tax liability (i.e., FICA).
  
• Built-in-gains tax – The Act makes permanent the reduction in S corporation recognition period for built-in-gains tax. This provision reduces the period to five years (versus ten) for an S corporation to hold its assets following a conversion from a C corporation to avoid the tax on built-in-gains.
  
• Extension of energy efficient commercial buildings deduction – The Act extends through 2016 the above-the-line deduction for energy efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of commercial buildings.

Individual Tax Extender Highlights:

• State and local sales tax deduction made permanent – Taxpayers will be able to take an itemized deduction for state and local sales taxes in lieu of deducting state and local income taxes. For example, several states such as Nevada, Florida, Texas, Wyoming, Alaska, South Dakota, and Washington do not impose income taxes. Residents in these states will be able to deduct actual sales tax paid or sales tax from a predetermined IRS tax table as an itemized deduction.
• Deduction for teacher’s classroom expenses made permanent – Under this provision, teachers, instructors, counselors, principals and aides can deduct up to $250 of unreimbursed expenses on Page 1 of their 1040 instead of including the expenses in their itemized deductions, where the taxpayer may not receive a benefit. Additional expenses may be deducted on Schedule A, subject to the overall two percent adjusted gross income floor on miscellaneous itemized deductions. Beginning in 2016, the dollar amount will be indexed for inflation and include professional development expenses.
  
• Cancellation of debt – Through 2016, taxpayers will be able to continue to exclude up to $2 million (or $1 million if married filing separately) of cancellation of debt income from the forgiveness or cancellation of a mortgage or debt relating to a primary residence.
• Mortgage insurance premiums – Through 2016, taxpayers will be able to continue to deduct mortgage insurance premiums paid or accrued during the year in connection with the acquisition of a primary or vacation home; however, this deduction will begin to phase out for taxpayers above $100,000 of adjusted gross income.
• Tuition and fees expense – Through 2016, taxpayers will be able to continue to take an above-the-line deduction on their tax return for up to $4,000 of qualifying expenses paid. Qualifying expenses include tuition, fees, books, supplies and equipment. This deduction phases out at adjusted gross income of $130,000 ($65,000 for single filers).
• Qualified charitable distributions made permanent – Individuals who are at least age 70 ½ can use their Individual Retirement Account (IRA) to make a tax-free distribution to charity for up to $100,000. For example, if you withdraw $100,000 from your IRA and direct the distribution to go directly to a charity, the distribution is excluded from your taxable income.

For more information, a summary of the legislation was recently published on The United States Senate Committee on Finance’s website.

There is still time remaining in 2015 to implement any of the tax saving extenders into your year-end tax planning strategy. For more information, please contact us.