2015 Tax Legislation: Extenders Plus More

On July 31st 2015, President Obama signed The Surface Transportation and Veterans Health Care Choice Improvement Act (H.R. 3236) that also contained some significant pieces of tax legislation:

Filing Due Dates

Effective for tax years beginning after Dec. 31, 2015 there will be changes to tax return due dates. These changes apply to tax returns that are due in 2017 and does not affect the current filing season. The changes are as follows.

• Form 1065 U.S. Partnership Returns. March 15th (or 2' months after the close of the tax year).
• Form 1120, regular C corporation returns. April 15th (or 3' months after the close of the tax year). The due date for S corporation returns remains March 15th.
• FBARs. Due April 15th with a maximum extension to October 15th (consistent with the Form 1040 filing deadline).

The Act effectively overturns the Supreme Court Decision in United States v. Home Concrete & Supply, LLC, No. 11-39 (2012), that an overstatement of basis does not result in an omission of income for statute of limitations purposes. Under the new law, the six year statute of limitations applies in a situation where the taxpayer overstates the basis on a disposition of an asset which consequently results in a substantial omission (25% or more) of income.

The new legislation requires consistency between the value reported on the Form 706 estate tax return and the stepped up basis used on the income tax return of the estate or beneficiaries of the estate.

The PATH Act

On Dec. 18, 2015 President Obama signed the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) into law. The PATH Act is much more comprehensive than extender packages of the recent past. First, it makes permanent many key tax provisions such as the research tax credit and enhanced Section 179 expensing. It also extends certain provisions for five years and others for two years. Lastly, it provides for enhancements to some of the extended provisions.

Permanent Extenders For Individuals

• State and Local Sales Tax Deduction. Election to claim sales tax as an itemized deduction in lieu of state income taxes.
• American Opportunity Credit. Up to$2,500 credit for the first four years of college tuition. The credit phases out for married taxpayers with gross income starting at $160,000 ($80,000 for single taxpayers).
• Teachers' Classroom Expense Deduction. Above the line $250 deduction for elementary and secondary school teachers' classroom expenses. Starting in 2016, this amount is indexed for inflation.
• Transit Benefits Parity. For tax years beginning in 2016, the inflation adjusted monthly exclusion amount for employees' transit passes and van pool benefits will be $255 in line with the inflation adjusted amount for qualified parking.
• Charitable Distributions from IRAs. Taxpayers who are 70' or older can make direct contributions from their IRA to qualified charitable organizations up to $100,000 per year. The contributions are not deductible as charitable contributions and the IRA distribution is not considered taxable income. The distribution also satisfies the taxpayer's required minimum distribution. Donor advised funds and supporting organizations are not eligible recipients.
• Qualified Conservation Contributions. A charitable contribution of capital gain real property for conservation purposes is deductible up to 50% (normally 30%) of adjusted gross income and qualifies for a 15 year (normally five years) carryforward.

Two Year Extenders For Individuals

• Qualified Tuition and Related Expenses Deduction. The PATH Act extends through 2016 the above the line deduction for qualified tuition and related expenses for higher education. The deduction is capped at $4,000 for taxpayers whose AGI is up to $65,000 ($130,000 for joint filers) and $2000 for AGI up to $80,000 ($160,000 for joint filers).
• Mortgage Debt Exclusion. The new legislation extends through 2016 the exclusion from income mortgage loan forgiveness on a principal residence of up to $2 million ($1 million for married filing separate).
• Mortgage Insurance Premium Deduction. The Act extends through 2016 the special treatment of mortgage insurance premiums (known as PMI) as deductible qualified residence interest subject to the adjusted gross income phase-outs (starting at $100,000 AGI).

Permanent Extenders For Businesses

• Code Section 179 Expensing. The new law makes permanent the election to expense up to $500,000 in qualified new or used fixed assets (as opposed to depreciating over the useful life). The $500,000 expense is subject to dollar-for-dollar phase-out once the cost of all qualifying property placed in service during the year exceed $2 million. The amounts are indexed for inflation beginning in 2016. The Act also reinstates the option to apply $250,000 of Section 179 expensing to qualified real property (qualified leasehold improvements, restaurant and retail improvement property). Starting in 2016, taxpayers can apply the full Section 179 expense to qualified real property.
• Accelerated Depreciation for Certain Qualified Property. The PATH Act permanently extends the 15-year cost recovery period for qualified leasehold improvements, qualified restaurant property and qualified retail improvement property. This provision exempts these expenditures from the normal 39-year depreciation period.
• Research Tax Credit. The Act permanently extends this provision which provides an incentive for businesses to invest in research and development. Additionally, starting in 2016, small businesses with less than $50 million in gross receipts will be able to offset the credit against their alternative minimum tax and certain start-ups (less than $5 million in receipts) can use the credit against their payroll tax obligations.
• 100% Gain Exclusion on Qualified Small Business Stock (QSBS). The exclusion applies to QSBS held by non-corporate taxpayers acquired after Sept. 27, 2010 and held for more than five years. Stock of a small business will qualify as QSBS if the business is a domestic C corporation with aggregate assets with a tax basis of less than $50 million, is engaged in a non-service business and uses at least 80% of its assets in an active trade or business. The amount of gain permitted to be excluded by a taxpayer from the sale of QSBS of a single corporation generally is limited to the greater of $10 million or 10 times the taxpayer's adjusted basis in the QSBS. The law also permanently extends the rule that eliminates QSB stock gain as a preference item for alternative minimum tax purposes.
• Reduced Recognition Period for S Corporation Built in Gains Tax. C corporations that elect S status pay a corporate level tax on the built in gains of their assets at the time of the S election if the gain is recognized during the recognition period. The PATH Act makes permanent the five-year recognition period.
• Charitable Deduction for the Contribution of Food Inventory. The Act makes permanent the enhanced deduction for contributions of food inventory to non-corporate business taxpayers. Under the enhanced deduction, the lesser of basis plus one-half of the item's appreciation or two times basis can be deducted in place of the standard lower of cost or market value. Additionally, starting in 2016, the limit on deductible contributions of food inventory increases from 10% to 15% of the business's adjusted gross income.

Five Year Extenders For Businesses

• Bonus Depreciation. For property placed in service in 2015-2017, the additional first year bonus depreciation percentage is 50%. It drops to 40% in 2018 and finally to 30% in 2019. The Act continues the election to accelerate the use of AMT credits in lieu of bonus depreciation and in 2016 increases the amount of unused AMT credits that may be used in lieu of bonus depreciation. Effective for 2016, the Act expands the eligibility of bonus depreciation to qualified improvement property which has the same criteria as qualified leasehold property except that it also includes improvements to owned real property. Additionally for 2016, if a taxpayer elects out of bonus depreciation, it will no longer be subject to an AMT adjustment for depreciation.
• Work Opportunity Credit (WOTC). The PATH Act retroactively restores and extends through 2019 the credits to employers for first year wages paid to individuals who belong to a targeted group. The Act also expands the credit to a new targeted group comprised of long term unemployment recipients. The maximum tax credit for WOTC is $2,400 per employee ($9,600 for qualified veterans).
• New Markets Credit. The Act authorizes the allocation of $3.5 billion per year for each year from 2015 through 2019 to fund credits for taxpayers who invest in businesses or economic development projects located in some of the most distressed communities in the United States.

Two Year Extenders For Businesses

• Empowerment Zone Tax Incentives. The PATH Act retroactively restores and extends until 2017 this incentive to businesses that are located in designated empowerment zones (generally economically distressed areas) and hire and retain employees who also live within these same zones. Businesses are eligible for a wage credit of up to $3,000 per employee. The credit is 20% of the first $15,000 paid to the employee.

Conclusion

Through legislation, the Congress and the President have expressed their willingness to provide tax incentives to taxpayers who are investing in our economy through capital improvements and research expenditures.

Richard H. Stieglitz is a tax partner and Martin Arking is a tax manager in the New York accounting firm of Anchin, Block & Anchin, LLP which specializes in providing accounting, tax and consulting services to law firms. He can be reached at 212-840-3456 or via e-mail at [email protected].