Global Tax Insights
Just In: President Signs Tax Extenders Into LawDecember 18, 2015
President Obama signs omnibus spending agreement permanently extending a number of tax credits and provisions.
Congress has made it possible to implement a few more tax-savings strategies before the clock runs out on 2015. The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) was officially signed into legislation by the President December 18th after being passed through the House on December 17th, then by the Senate on the 18th. Without this legislation, many valuable tax breaks would not have been available for 2015.
The PATH Act will also make tax planning a little easier in future years because all of the extensions go through at least 2016 — and many are permanent. For businesses, some of the most valuable breaks extended by the PATH Act are those related to depreciation. But the act also includes many other popular breaks for businesses as well as individuals.
3 Depreciation-Related Breaks
The PATH Act extends — and makes some changes to — these depreciation-related breaks:
1. Bonus depreciation. The PATH Act extends 50% bonus depreciation through 2017. It then reduces it to 40% for 2018 and 30% for 2019. Under bonus depreciation, businesses can take an additional depreciation deduction in the year that qualified property is placed in service.
For 2015, qualified property includes new tangible property with a recovery period of 20 years or less, off-the-shelf computer software, water utility property and qualified leasehold improvement property. Beginning in 2016, the PATH Act allows bonus depreciation for qualified improvement property regardless of whether the property is leased.
The PATH Act also allows corporations to claim unused alternative minimum tax (AMT) credits in lieu of bonus depreciation. Beginning in 2016, it increases the amount of AMT credits that can be used in lieu of bonus depreciation.
2. Section 179 expensing election. The PATH Act makes permanent higher limits under Sec. 179 of the Internal Revenue Code. Sec. 179 allows businesses to immediately expense the cost of qualified property (generally depreciable tangible personal property) in the year it’s placed in service. So businesses can accelerate their tax deductions compared to recovering the costs over several years under the applicable depreciation schedule.
The PATH Act allows a business to deduct up to $500,000 in qualified new or used property for 2015. However, a dollar-for-dollar phase-out applies to the extent that the cost of all qualified property placed in service during the tax year exceeds $2 million. These limits will be indexed for inflation beginning in 2016.
Without the PATH Act, the expensing limit for 2015 would have been only $25,000, with a $200,000 phase-out threshold.
The new law also permanently allows off-the-shelf computer software to be considered qualified property. In addition, beginning in 2016, air conditioning and heating equipment will be considered qualified property. Previously, they were specifically excluded from such treatment.
3. Depreciation-related breaks for qualified leasehold-improvement, restaurant and retail-improvement property. The PATH Act makes permanent the ability to apply a shortened recovery period of 15 years (rather than 39 years) to such property. It also makes permanent the ability to apply the Sec. 179 expensing limit to such property — up to $250,000 for 2015 and up to the full Sec. 179 expensing limit beginning in 2016.
Other Valuable Breaks
The PATH Act extends (and, in some cases, enhances) many other breaks for businesses. For example, it permanently extends the research credit , transit benefit parity and the deduction for charitable contributions of food inventory. It extends through 2019 the Work Opportunity credit and the New Markets credit. And it extends through 2016 Empowerment Zone tax incentives and various energy-efficiency tax credits.
The new law also extends many valuable breaks for individuals. Breaks made permanent include direct IRA distributions to charity, the deduction for certain expenses of elementary and secondary school teachers, the state and local sales tax deduction, the small business stock gains exclusion, the enhanced child tax credit and the American Opportunity credit. Extended through 2016 are the mortgage debt forgiveness exclusion, deductibility of mortgage insurance premiums and the qualified tuition and related expenses deduction.
Act Quickly to Reduce Your 2015 Tax Liability
Because most of these breaks had expired at the end of 2014, only now can you take action to potentially maximize your 2015 tax savings from them. For example, you may want to acquire property eligible for the now-extended depreciation-related breaks.
But you must act quickly. Property generally must not only be purchased but also be placed in service by December 31, 2015, in order to qualify for these breaks on your 2015 return.
Also keep in mind that additional requirements and limitations apply to all of these breaks. So before taking action, please contact us to make sure the tax benefits will be what you expect. We can also answer any questions you have about other aspects of the PATH Act.
Read more about additional 2015 Tax Extenders here: