The Protecting Americans from Tax Hikes (PATH) Act was signed into law and enacted in December 2015 and is considered to be taxpayer-friendly, encompassing several provisions that affect both individuals and businesses. The PATH Act renewed many of the temporary tax provisions that had previously expired. Some provisions were made permanent; some were extended through the end of 2016; and some were extended through the end of 2019. It is a juggling act to keep up with the new provisions – 115 in all – and trying to make sense of whether one or more will affect you now, or in the future, can be boggling real challenge. Here are a few of the more significant provisions that could impact your current year taxes:
Permanent Expansion of the Section 179 Deduction
Section 179 of the tax code allows small businesses to immediately deduct up to $500,000 of certain depreciable business assets, with a $2 million overall investment limit before a phase-out. Without the new tax law, the maximum deduction available would have been $25,000 of investments, with an investment limit of $200,000. The PATH Act made the expanded Section 179 limits permanent and progressive by indexing them to inflation.
Bonus Depreciation Extension
The Act extended this provision through 2019, rather than making it permanent. The bonus depreciation provision allows all businesses to immediately deduct 50% of the cost of qualified property acquired and placed in service during the tax year. The percentage decreases to 40% in 2018 and to 30% in 2019.
The Research and Development Credit (R&D) is Permanent
The R&D tax credit allows businesses that engage in certain research activities to lower their overall tax burden by allowing a credit to offset tax liability based on qualified costs. This credit had expired and was renewed 16 times, and had limited application. PATH may have changed all that by making changes to the R&D credit that represent some of the most taxpayer-friendly provisions in the Act. The credit was not only extended and made permanent by the Act, but expanded and made available to many businesses not previously eligible to take advantage of this benefit. Some of the modifications, which became effective as of January 1, 2016, include the following:
- Credit Allowed Against Alternative Minimum Tax – The R&D Credit will now be allowed to offset the Alternative Minimum Tax (AMT) in the case of eligible small businesses or owners. An eligible small business under this provision is defined as a private company with average annual gross receipts not exceeding $50 million for the prior three years. The R&D tax credit for pass-through entities, such as S Corporations, LLCs and Partnerships, which meet this threshold will be available to the members, partners or shareholders to reduce their personal income tax liabilities, even if they are subject to AMT tax. Any unused credits can be carried back one year and forward 20 years.
- Payroll Tax Credit Available for Start-Up Businesses - The modified law now allows qualified small businesses to elect to utilize the R&D credit to reduce their FICA tax liability. A qualified small business is defined as a Corporation, Partnership, LLC or Sole Proprietorship which is less than five years old, with less than $5 million in annual gross receipts in each of the preceding five years. The Payroll Tax Credit will be refundable up to $250,000 in payroll taxes per year. Any excess credit can be carried forward to future years. By making the credit permanent and expanding its application, the Act has given a lift to the often overlooked yet valuable R&D tax credit.
The Earned Income Tax Credit (EITC) Was Permanently Expanded The EITC is based on a taxpayer's filing status and number of dependent children. Temporary provisions expanded the eligibility requirements to married couples and taxpayers with three or more children. The PATH Act makes the EITC expansion permanent, while adding several anti-fraud provisions to combat taxpayer abuse.
The American Opportunity Credit is Now Permanent
The American Opportunity Credit, which provides for a tax credit of up to $2,500 of qualified education expenses and was set to expire in 2018, was made permanent by the Act.
Charitable Distributions from IRAs Are Now Permanently Tax-Free
The Act made permanent the provision allowing individuals over 70½ years old to make tax-free distributions directly from an Individual Retirement Account (IRA) to a qualified charitable organization. The Qualified Charitable Distribution (QCD) is limited to $100,000 annually per taxpayer, and the funds must be distributed directly to the charity. The QCD may also be used to satisfy the required minimum distribution for the year.
Due to the enormity of the bill, we have highlighted just a few of the PATH Act's 115 revenue provisions. However, all provisions included in the Act are worth reviewing with your tax professional, as proper planning at this year-end is crucial to reap the benefits of these changes. The Marcum Tax and Business Practice group continually reviews changes implemented by federal, state and local taxing authorities. For a more in-depth analysis of the PATH Act, visit Marcum's website for news and insights in the ever-changing world of tax legislation.