raffa resources
raffa resources
raffa resources
​Finally…Tax Extenders You Can Put Your Money On!

​By Rebecca Merrill, Tax Manager at Raffa, P.C.

A strong financial future begins with solid tax planning. Unfortunately, when favorable tax legislation is passed in the last weeks of the year, few can take advantage of those tax incentives so late in the game. Taxpayers and tax practitioners have criticized some of the prior extender bills as too short-lived for any meaningful tax planning. On December 18, 2015, President Obama signed into law P.L. 114-113, the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”), and unlike past legislation for tax extenders, this time many of the provisions are permanently renewed and certain tax benefits and credits have been retroactively reinstated.  However, not all tax extender provisions were made permanent; a few, such as 50% bonus depreciation for businesses and the work opportunity tax credit, are only extended a few years.  For the most part, taxpayers and practitioners will no longer have to wait for Congress to pass a temporary tax extenders law in order to effectively implement tax planning strategies.

The significant provisions and highlights of the PATH Act are summarized below. Let’s start by discussing a few of the permanent extensions impacting businesses.

Section 179 Deductions: 
Section 179 allows a business to currently expense up to $500,000 of qualified property.  Taxpayers have benefitted considerably from this section of the tax code and the increase to the expensing limits over the years.  The PATH Act made the Section 179 deduction permanent at the $500,000 level. Businesses purchasing qualifying equipment exceeding $2 million will be subject to a deduction phase-out dollar-for-dollar and completely eliminated above $2.5 million. The Section 179 cap will be indexed to $10,000 inflation increments in future years. 

The extenders bill permanently allows taxpayers to expense off-the-shelf computer software and qualified real property (i.e., qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) under section 179, provisions that also expired at the end of 2014. Air conditioning and heating units have also been added to the list of qualified property beginning in 2016. The Section 179 deduction is subject to net business income limitations; excess deductions can be carried forward to future years.

Bonus Depreciation:
Bonus depreciation has resulted in significant tax savings for our clients, since its inception in 2001, as part of the Job Creation and Worker Assistance Act of 2002. After many acts reinstating bonus depreciation, the PATH Act finally puts it to rest in 2019. Businesses will be able to depreciate 50 percent of the cost of new furniture and equipment acquired and placed in service during 2015, 2016 and 2017.  Bonus depreciation then begins to phase down to 40 percent in 2018 and 30 percent in 2019.

Beginning in 2016, the bill allows bonus depreciation to be claimed on qualified improvement property, regardless of whether the property is subject to a lease, and removes the requirement that an improvement be placed in service more than three years after the building was placed in service.  The definition of “placed in service” becomes crucial around the year end prior to a phase down.  Qualified assets must be placed in service, not just ordered or under contract, by December 31st to be eligible for the bonus percentage in that year.

Research Credit:
The research credit for qualifying research and development activities has been made permanent, finally, after 34 years of temporary status. Additionally, for taxable years beginning after December 31, 2015, eligible small businesses are permitted to utilize these research credits to offset both regular and AMT liabilities. They can elect to claim a certain amount of their research credit as a payroll tax credit against their Social Security insurance liability rather than their income tax liability.  This provision will benefit innovative start-up companies that previously had no incentive to claim the credit due to accumulated tax net operating losses. 

S Corporation Built-in Gains Tax Recognition Period:
For all conversions of C corporations to S corporations in taxable years beginning in 2012, 2013, and 2014, the applicable recognition period was shortened to five years. This five-year recognition period has been made permanent for taxable years beginning after December 31, 2014.

REIT changes:
The legislation includes a number of provisions for real estate investment trusts (REITs) that will lighten some rules and tighten others. The changes surrounding REITs are rather complex. Consult with your tax advisors at raffa,p.c. for an in-depth discussion of the new rules.

individual extenders:
the path act includes a number of benefits targeted at individual taxpayers. among these benefits is a provision that permanently extends the deduction for state and local sales taxes, which is especially advantageous for taxpayers living in states with no individual income tax.  also made permanent is a provision providing uniformity for the income exclusion allowed for employer-provided commuter benefits, bringing mass transit benefits up to a maximum $250 per month (from $130), in line with parking benefits. this provision is retroactive to january 1, 2015. the path act makes permanent the earned income tax credit, the child tax credit, and the american opportunity tax credit for qualifying educational expenses that were enacted in the american recovery and reinvestment act of 2009 and scheduled to expire in 2017.  some popular provisions for the exclusion of discharged qualified principal residence indebtedness, treatment of mortgage insurance premiums as deductible mortgage interest, and the above the line deduction for qualified tuition expenses, were slated to expire as of december 2014.  these incentives have been extended for two years, retroactively to 2015 and 2016.

the path act does much more than deal with extensions, permanent or otherwise. the taxpayer-friendly provisions contained within this act will be a major benefit in tax planning for your business and individual needs.  raffa pc’s tax advisors are available to help you assess how these changes will impact your specific situation. please contact mitra mamdouhi, tax partner, at mmamdouhi@raffa.com or rebecca merrill, tax manager, at rmerrill@raffa.com for more information.