The Protecting Americans from Tax Hikes Act of 2015 was signed into law on December 18, 2015. While end of the year tax provision extensions by Congress have become common place for many temporary incentives, the PATH Act went further than many previous extensions – making several critical tax incentives for businesses permanent.

Both individual and business incentives were extended or made permanent by the law.

Business Incentives Made Permanent
Perhaps the most important provisions of the law for business owners are the permanent extensions to the R&D Tax Credit and Section 179.

The R&D Tax Credit was not only made permanent, allowing taxpayers to rely on the credit going forward and to plan R&D spending with greater certainty, but it also provides that eligible small businesses may claim the credit against the alternative minimum tax liability or in some cases against the employer’s payroll tax liability for qualifying start-up businesses. For AMT purposes, the definition of eligible small businesses includes businesses with less than 50M in revenue. For utilization against payroll taxes, startup businesses must have less than 5M in revenue in the year the credit was claimed and no revenue in the prior 5 years. These changes will dramatically affect the ability of eligible businesses and business owners to utilize tax credits.

The Section 179 provision permanently extends the small business expensing limitation and phase-out amounts in effect from 2010 to 2014, setting the permanent thresholds at $500,000 and $2 million. The previous amounts were $25,000 and $200,000, respectively. The provision also modifies the expensing limitation by indexing both the $500,000 and $2 million limits for inflation beginning in 2016. The provision further modifies the expensing limitation with respect to qualified real property by eliminating the $250,000 cap beginning in 2016.

The law also makes permanent the tax break for mass transit and parking benefits, and the option to claim an itemized deduction for state and local general sales taxes in lieu of a deduction for state and local income taxes.

Business Incentive Extenders and Other Provisions
The law suspends the 2.3 percent excise tax on medical devices through 2017, and permanently extends the exception from subpart F income for active financing income. The legislation also permanently extends the rule reducing to five years (rather than 10 years) the period for which an S corporation must hold its assets following conversion from a C corporation to avoid the tax on built-in gains.

The law extends through 2019 and modifies the Work Opportunity Tax Credit, which gives retailers a tax incentive to hire the disabled, welfare recipients and other economically challenged individuals. The law changes the credit beginning in 2016 to apply to employers who hire qualified long-term unemployed individuals and increases the credit with respect to such long-term unemployed individuals to 40 percent of the first $6,000 of wages.

The law extends “bonus depreciation” through 2019, with a plan to phase out the incentive after five years. The bonus depreciation percentage is 50 percent for property placed in service during 2015, 2016 and 2017 and phases down, with 40 percent in 2018, and 30 percent in 2019. The provision continues to allow taxpayers to elect to accelerate the use of AMT credits in lieu of bonus depreciation under special rules for property placed in service during 2015. The provision modifies the AMT rules beginning in 2016 by increasing the amount of unused AMT credits that may be claimed in lieu of bonus depreciation.

The law also authorizes the allocation of $3.5 billion of new markets tax credits for each year from 2015 through 2019. The tax extenders package also includes a five-year extension of the wind energy production tax credit to lead to a phase-down of the industry-specific tax credit. The wind production tax credit will be 100 percent in 2015 and 2016, 80 percent in 2017, 60 percent in 2018 and 40 percent in 2019.

The tax package includes an extension of the existing biodiesel fuel blender credit, the small agri – biodiesel producer credit, the tax credit for cellulosic biofuels producers, the alternative fuel vehicle refueling tax credit, and bonus depreciation for cellulosic biofuel facilities.

Personal and Family Provisions

In addition to the business provisions, a number of provisions of the law affect personal tax planning. Certain individual provisions have been made permanent including an enhanced Child Tax Credit, an enhanced American Opportunity Tax Credit, an enhanced Earned Income Tax Credit, the above-the-line deduction for teachers who buy school supplies and the charitable deduction of contributions of real property for conservation purposes.

The law also extends and modifies the exclusion from gross income the discharge of qualified principal residence debt, the extension of mortgage insurance premiums as interest for purposes of the mortgage interest deduction, and the extension of above the line deductions for qualified tuition and related expenses.

The law also expands the definition of qualified higher education expenses for which tax preferred Section 529 distributions are eligible. Another provision permanently extends the ability of individuals at least 70½ years of age to exclude from gross income qualified charitable distributions from Individual Retirement Accounts (IRAs) of up to $100,000 per taxpayer in any tax year.

If you have any questions about the changes included in the PATH Act or would like to discuss how these changes may affect your business or personal tax planning, please contact our office.