President Signs Tax Extenders Legislation
Many temporary tax provisions expired at the end of 2014, and taxpayers were anxiously waiting all year to see if they would be extended. This is a common occurrence year after year and can make tax planning difficult. On December 18, 2015, President Obama signed the Protecting Americans from Tax Hikes Act of 2015 (the “Act”). The Act makes many of these temporary tax provisions permanent, conclusively ending the tax uncertainty surrounding them. The Act also extends certain provisions through 2016 and others through 2019.
While it may be too late in the year to enact tax planning regarding some of these items, taxpayers can still take advantage of certain provisions that apply to them in order to lower their overall tax bill. Since it would be too lengthy to list out all of these provisions, as the text of the full Act is in excess of 200 pages, summarized below are of some of the most significant provisions of the Act.
Deduction for state and local sales tax – An itemized deduction for state and local income tax is currently allowed under the tax code. A deduction for either actual or a deemed amount of state and local sales tax, in lieu of the deduction for state income tax, has been extended by the Act. This is especially helpful for taxpayers living in a state that does not have a state income tax, such as Texas or Florida. The extension of the deduction for state and local sales tax is effective beginning after December 31, 2014.
Tax-free distributions from individual retirement accounts for charitable purposes – Certain withdrawals from IRA’s are included in taxable income. To the extent up to $100,000 per taxpayer per year is distributed to a qualified charitable organization by a donor who is at least 701/2 years old, this amount will be excluded from taxable income and qualifies as part of the taxpayer’s Required Minimum Distribution for that tax year. This means that taxpayers who take advantage of this will have a lower AGI, which then could lower the threshold for deducting certain expenses, such as medical expenses. This provision is extended as of December 31, 2014.
Research credit – Among other research credits, taxpayers are allowed to claim a credit for incremental increases in qualified research and development (R&D) work performed within the United States. This credit encourages businesses to undertake these R&D activities. Additionally, in a boost for start-ups and small businesses, qualifying businesses with gross receipts under $5 million and no prior receipts may take the credit against payroll taxes instead of income taxes if they are not income tax payers for the next five years. This provision to make the credit permanent, as well as the changes relating to start-up businesses, applies to all payments made after December 31, 2014.
15-year qualified leasehold improvements – Typically, improvement to leaseholds are depreciable over a 39-year period (the same deduction period that applies to nonresidential real property), which could be well in excess of the term of the lease. If the leasehold improvement property meets certain conditions, it will instead be depreciable over a 15-year life. The 15-year life for qualified leasehold improvement property is extended to assets placed in service after December 31, 2014.
Section 179 deduction – This is generally geared towards smaller companies who place less than $2 million of assets in service in the tax year. As long as $2 million or less of qualifying property is placed in service during the tax year, up to $500,000 of qualifying property can be expensed up front, rather than depreciated over its useful life. The threshold for assets placed in service was scheduled to be reduced to $200,000 and the up-front Section 179 deduction was to be reduced to $25,000, however the higher threshold that existed in 2014 has been reinstated. The $2 million threshold and $500,000 deduction are reinstated for years beginning after December 31, 2014 and indexed for inflation after 2015.
Reduction in S corporation recognition period for built-in gains tax – S corporations do not pay corporate income taxes, instead their shareholders are taxed on their pro-rata share of flow-through income. Previously, when a C corporation converted to an S corporation, there was a 10 year period during which any of the built-in gains existing on the date of the conversion will be subject to tax at the maximum corporate tax rate if this gain is recognized. Effective December 31, 2014, any corporation making an S corporation election will only have a 5-year period for which built-in gains are taxable if recognized during that period.
American Opportunity Tax Credit (“AOTC”) – The AOTC is a modification of the former Hope credit for qualified tuition expenses. The amount of the credit is up to $2,500 for each of a student’s first four years of post-secondary education and begins to phase out at modified AGI’s of $80,000 ($160,000 for taxpayers married filing jointly). This credit has been extended retroactively for tax years beginning after December 31, 2014.
EXTENSIONS THROUGH THE YEAR 2016
Qualified tuition deduction – A deduction of up to $4,000 (not subject to the itemized deduction limitations) exists for higher education tuition and related expenses. The deduction is allowed for individuals with an AGI of up to $80,000 ($160,000 if filing joint). This provision will be extended though the 2015 and 2016 tax years.
EXTENSIONS THROUGH THE YEAR 2019
Work opportunity tax credit – The work opportunity credit provides a credit for employers hiring individuals from certain targeted groups, such as qualified veterans, if certain conditions are met. The credit is calculated as a percentage of wages. The credit is extended for five years through taxable years beginning on or before December 31, 2019.
Bonus depreciation – While the Section 179 deduction generally applies to smaller businesses, bonus depreciation allows businesses of all sizes to take an additional up-front deduction of 50% on qualified property. Qualified property includes new property placed in service in the U.S. The 50% up-front deduction will be extended for new property placed in service in the U.S. prior to December 31, 2017. For property placed in service during 2018, the bonus depreciation deduction will be 40%, and the deduction will be 30% for qualified property placed in service during 2019.
Look-through rule for controlled foreign corporation related party payments – Interest, dividends, rents and royalties received by a controlled foreign corporation from a related controlled foreign corporation are considered foreign person holding company income (“FPHCI”), which can generate a deemed dividend to the U.S. shareholder, meaning that the U.S. shareholder recognizes dividend income even though no cash is distributed to them. The Sec. 954(c)(6) look-through rule allows the controlled foreign corporation to “look through” to the activity that generated the income, and if the activity was a non-passive activity, allows that income to be exempt from the FPHCI rules. This rule is extended for taxable years beginning after December 31, 2014 through taxable years ending before January 1, 2020.
Other provisions of the Act include, among other items, extensions or modifications of: the earned income tax credit; the child tax credit; Subpart F exception for active financing income; exclusion of discharge of indebtedness on principal residences; transit benefits parity; extension of certain recovery periods for fixed assets; extension of certain energy and alternative fuels credits; suspension of the medical device excise tax; exclusion of gain on certain small business stock; domestic production activities deductions for certain Puerto Rico activity; rules regarding real estate investment trusts; increased FIRPTA withholding in certain circumstances; modifications to section 529 plans to include computer and peripheral equipment, software and internet access as qualified higher education expenses; and certain administrative changes.
This is a brief overview of the tax extenders provisions. If you would like to know more in-depth information regarding any of these provisions and how they could apply to you, please feel free to contact us directly at firstname.lastname@example.org or 212-245-5900.
Eric Swerdlow, CPA, MST, is a Tax Manager who has been with FF&F for 10 years. He specializes in corporate and partnership taxation, with a strong background in consolidated corporations, business planning, provisions for income tax, international operations, foreign tax credits, partnership basis step-up and special allocations, fixed assets, and capitalization. Eric’s focus industries include shipping, transportation, oil and gas services, energy, and manufacturing and wholesale.