The Protecting Americans from Tax Hikes (PATH) Act (P.L. 114-113), which was signed into law on December 18, 2015, contains over 100 tax provisions. The law makes permanent more than 20 provisions that had expired at the end of 2014. It also extends other provisions through 2019, or for two years (2015 and 2016). According to the Joint Committee on Taxation, the extenders are projected to cost the government $628 billion over 10 years. The extenders and other provisions in the PATH Act impact individuals and businesses. Here is a roundup of the key provisions for businesses and how they affect 2015 returns as well as tax planning for 2016.
A number of business deductions have been made permanent or extended, as indicated below:
Write-offs for equipment purchases
Two important deduction options apply to purchases of equipment and machinery:
• Sec. 179 deduction – The $500,000 deduction limit and the $2 million cap on equipment purchases before the deduction limit is phased out, have been made permanent. They had been set to revert to $25,000, and $200,000, respectively, in 2015. Starting in 2016, the dollar amounts can be adjusted for inflation. Also made permanent is the treatment of off-the-shelf software as qualifying for a Sec. 179 deduction as well as the option to make or revoke a Sec. 179 election without IRS consent.
• Bonus depreciation – This deduction, which applies to new (not pre-owned) property, has been extended through 2019. However, the 50% write-off for the cost of qualified property applies only for 2015, 2016, and 2017. In 2018, the deduction decreases to 40%; in 2019 it is 30%.
Write-offs for leasehold, restaurant, and retail improvements
Several tax breaks relate to write-offs for these improvements:
• Sec. 179 deduction – Such improvements qualify for the Sec. 179 deduction. However, for 2015, there is a $250,000 cap. Starting in 2016, the cap is removed.
• Bonus depreciation – Qualified leasehold improvements qualify for the allowable percentage of bonus depreciation in 2015 (Code Sec. 168(k)). For 2016 through 2019, bonus depreciation applies to qualified improvements, which can include restaurant or retail improvements as well as leasehold improvements; there is no longer a requirement that the improvement be placed in service more than three years after the building was first placed in service. The 50% percentage applies for 2015, 2016, and 2017. The percentage decreases to 40% in 2018 and 2019.
• 15-year recovery period – Any amounts for improvements not deducted using the Sec. 179 deduction or bonus depreciation can be recovered using straight line depreciation over a 15-year recovery period (Code Sec. 168). This recovery period has been made permanent.
Other write-off rules:
• Film and television production costs – These costs in 2015 and 2016 can be expensed up to $15 million, a tax break that benefits small producers (Code Sec. 181). For 2016, this deduction rule applies to theater productions as well.
• Sports complexes – A seven-year recovery period applies to motorsports entertainment complexes (Code Sec. 168).
• Race horses – A three-year recovery period for race horses applies through 2016 (Code Sec. 168).
Corporations can deduct their contributions up to 10% of taxable income. Contributions by pass-through entities are claimed by owners on their personal returns, subject to their adjusted gross income limits.
• Conservation easements – The enhanced deduction limit on conservation easements is permanent (Code Sec. 170(b)). Effectively, the deduction is up to 50% of adjusted gross income (instead of the usual 30% cap on donations of appreciated property). Farmers and ranchers have a 100% limit. Also the carryover period for deductions that cannot be fully used in the current year because of the AGI cap is 15 years (instead of the usual five-year carryover). Starting in 2016, the special rules apply to conservation easements by corporations under the Alaska Native Claims Settlement Act.
• Donations of food inventory – Businesses can take an enhanced charitable deduction for donations of their food inventory (Code Sec. 170). This rule has been made permanent.
Tax credits usually are used to reduce income tax liability on a dollar-for-dollar basis. Some credits have been extended temporarily; others have become permanent.
The 20% credit for increasing research expenditures, which was first introduced into the law in 1981, has been made permanent (Code Secs. 38 and 41). This credit had been subject to numerous expirations and extensions. With permanency, businesses can plan ahead for their research activities.
Starting in 2016, small businesses can use up to $250,000 of the research credit as an offset to the employer’s Social Security taxes, rather than as an offset to income tax liability. Small businesses for this purpose are defined as those with gross receipts for the taxable year of less than $5 million and no gross receipts for any year before the five taxable year period ending with the current taxable year. This break helps small technology businesses with little or no revenue benefit taxwise from their research activities.
There are several employment-related credits that have been extended:
• Work opportunity credit has been extended through 2019 (Code Secs. 51 and 52). Starting in 2016, the credit applies for hiring the long-term unemployed (those unemployed for at least 27 weeks).
• Empowerment zone employment credit has been extended for 2015 and 2016 (Code Sec. 1396).
• Indian employment credit has been extended for 2015 and 2016 (Code Sec. 45A).
• Credit for wage differential payments to reservists called to active duty has been made permanent (Code Sec. 45P).
Two key tax rules affecting S corporations and their shareholders have been made permanent:
Basis adjustment for charitable donations
When S corporations donate appreciated property, shareholders must reduce their basis in S corporation stock only by their share of the corporation’s adjusted basis in the property (Code Sec 1367). This is so even though their share of the charitable contribution deduction is based on the fair market value of the property. Because a shareholder’s deduction for losses that pass through are limited to his/her share of basis in stock and debt, this favorable basis adjustment rule allows for a greater loss deduction by a shareholder when the corporation has a bad year.
Built-in gains period
When a C corporation elects S corporation status, any gain in appreciated property is taxed to the S corporation if the property is disposed of within a set period. Originally, the built-in gains period had been 10 years. It has been reduced to five years (Code Sec 1374).
Various energy-related provisions have been extended temporarily only for 2015 and 2016:
The deduction for commercial buildings that achieve certain energy standards is $1.80 per square foot (Code Sec. 179D).
There is a 10% credit for the cost of buying an electric motorcycle (Code Sec. 30D). The credit is capped at $2,500. However, the previous credit for a three-wheeled vehicle which expired at the end of 2014 has not been extended.
This credit equals $1,000 in the case of a new home that meets a 30% standard for efficiency; it is $2,000 in the case of a new home that meets a 50% standard (Code Sec. 45L). Only manufactured homes are eligible for the $1,000 credit.
Alternative fuel refueling property
There is a credit for qualified property up to 30% of cost, up to set dollar limits (Code Sec. 30C). The basis of the property is reduced by the amount of the credit. No credit can be claimed if the cost is expensed under Code Sec. 179.
Other tax changes
Various other tax rules have changed. Some changes are temporary; others are permanent.
Parity for transportation fringe benefits
The amount of the exclusion is the same for employer-paid free parking, monthly transit passes, and van pooling (Code Sec. 132(f)). For 2015, the exclusion amount for these transportation fringe benefits is $250 per month (it had been only $130 for transit passes and van pooling). For 2016, the monthly cap is $255 (Rev. Proc. 2015-53, IRB 2015-44, 615).
Because of the reinstatement of parity, the IRS has provided guidance to employers on how to handle overwithholding (Notice 2016-2, IRB 2016-2, 265). For 2015, employers must reduce the taxable wages of affected employees, as reported on Forms 941 and W-2 and any equivalent forms, by the amount of any excess transit benefits. An employer has a duty to assure that its employee’s rights to recover overcollected taxes are protected by repaying or reimbursing overcollected amounts. Alternatively, an employer may obtain the employee’s consent to the filing of the refund claim. No refund to the employer is allowed for the overpayment of withheld income tax which the employer deducted or withheld from an employee. An employer can correct overpayments by filing Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund.
Exclusion for small business stock
Section 1202 stock, which can be issued by a qualified small business, enjoys special tax treatment. A qualified small business for this purpose is a C corporation that is in retail, wholesale, manufacturing, or technology, and that meets certain other conditions. Under the new law, if the stock is held more than five years, all of the gain on the sale of the stock is excludable from gross income. The 100% exclusion had been set to revert to the old 50% exclusion, but the 100% exclusion has been made permanent.
Excise tax on medical devices
The 2.3% excise tax imposed by the Affordable Care Act on manufacturers or importers of medical devices has been suspended for 2016 and 2017 (Code Sec. 4191). It is set to reapply in 2018 unless Congress again changes this rule.
Transmittals for W-2s and 1099s
Starting with reporting for wages and nonemployee compensation in 2016 (i.e., W-2s and 1099-MISCs filed in 2017), the transmittals to the Social Security Administration (for W-2s) and to the IRS (for 1099s) are due by the same date as furnishing them to workers (Code Secs. 6071 and 6402). Thus, in 2017, the deadline is January 31, 2017.
De minimis safe harbor for errors on information returns
Employers do not have to file corrected information returns if the error is de minimis (Code Secs. 6721 and 6722). An error for any single amount not exceeding $100 (or $25 in the case of withholding or backup withholding) need not be corrected.
The changes made by the PATH Act allow businesses to do multi-year tax planning. However, Speaker Paul Ryan of the U.S. House of Representatives is seeking comprehensive tax reform before the November election. This could dramatically change the “permanent” rules just enacted. Toward this end, on February 4, 2016, he appointed Rep. Brady, chairman of the House Ways and Means Committee, to head up a six-member group “tasked with developing a pro-growth agenda” with the ultimate goal of developing a new tax code. The rules that have been made permanent may not be so permanent.