Congress Passes Omnibus, Making Permanent Several Tax Incentives and Extending Others

The “Protecting Americans from Tax Hikes (PATH) Act of 2015”

December 18, 2015

Once again, Congress scrambled to authorize spending to keep the government running and to reauthorize a package of tax provisions before heading home for the holidays. Known as “tax extenders” in Washington, these provisions include roughly 50 tax reductions and tax breaks that expire every year, including powerful business incentives. However, instead of merely extending the measures another year, Congress made some provisions permanent, taking off the table some of the anxiety that has become a December tradition. Both the spending bill and tax extenders have passed and are expected to be signed by President Obama soon.

Permanent provisions of the Act include:

• Section 179 Tax Deductions: Great news for small businesses that have qualified in recent years to deduct up to $500,000 of the cost of qualifying asset acquisitions, with a phase-out beginning at $2 million. These thresholds were scheduled to drop down to $25,000 and $200,000 respectively as of January 1, 2015. Instead, the deal reached this week permanently fixes the amount at $500,000 and indexes the amount for future years.

Depreciation for Qualified Retail, Restaurant and Retail Establishments: The legislation makes permanent a 15-year depreciable life for qualified assets

• R&D Tax Credits: This is big news for businesses. Starting in 2016, those businesses with less than $50 million in gross receipts can use the R&D Tax Credit to offset alternative minimum tax. Further, there are certain start-up businesses without a tax liability that will be able to use the tax credit to offset payroll taxes.
• Reduction in S Corporation Built-in Gains Recognition Period: Owners of C corporations who have contemplated making an election to be taxed as an S corporation will now only be subject to corporate-level tax on the disposition of appreciated assets owned at the conversion date for five years, rather than the ten under previous law.

While not made permanent, several other provisions were extended, including:

• Bonus Depreciation: The 50% immediate expensing of asset acquisitions that has existed in one form or another since 2000 will be permitted at 50% for 2015, 2016 and 2017 before it is reducing to 40% in 2018, 30% in 2019 and nothing thereafter.  
• Section 179D Tax Deductions – Energy-Efficient Commercial Buildings: Extends through 2016 the deduction of certain heating, cooling and lighting improvements to commercial property through 2016.
• Work Opportunity Tax Credit: The federal tax credit available to employers who hire and retain veterans and individuals from other target groups with significant barriers to employment is extended is extended through 2019.
• Excise Tax on Medical Devices: The legislation suspends the 2.3 percent excise tax on medical devices through 2017.

Other changes include:

• Allowing foreign investors to increase their ownership percentage of publicly traded REITs without being taxed on sales of the interests, and exempting foreign retirement and pension funds from being taxed on sales of REITS holding U.S. real estate.
• Removing the ban on U.S. oil exports.

Individual taxpayers were not left out—individual tax provisions that have been made permanent include enhancements to child tax credits, earned income credits and American opportunity tax credits, among others. What may be of most interest to many taxpayers is that the ability to choose an itemized deduction for state and local sales taxes in place of income taxes was made permanent.

The so-called “Cadillac Tax” on high-priced health insurance plans that was scheduled to begin in 2018 has been delayed an additional two years.

Look for more details on how the Act may affect businesses and individuals. As always, contact your Smith and Howard tax professional at 404-874-6244 prior to taking any action.