A new PATH: Legislation modifies tax relief provisions

Jaime Martinez
Jaime Martinez

Just before their holiday break, Congress passed and President Barack Obama signed the Protecting Americans from Tax Hikes (PATH) Act of 2015, modifying many of the more than 50 tax relief provisions upon which businesses and individuals have come to rely.

The following isn’t a comprehensive list of all the items addressed in the legislation, but offers a summary of those items most commonly used and the modifications made by the PATH Act.

For businesses:

Section 179 deductions —  this allows a business to potentially deduct the full amount of the purchase price for qualifying assets. Because this is considered a small business tax incentive, the maximum amount of a 179 deduction allowed for the 2015 tax year is $500,000 and begins to phase out on a dollar-for-dollar basis once the cost of qualifying assets purchased during the year reaches $2 million.  These limits were scheduled to drop to $25,000 and $200,000, respectively, after 2014, but have been retroactively reinstated for the 2015 tax year, made permanent and will be indexed for inflation in future years.     

Research & development credit — this credit is calculated on qualified research and experimental costs related to the design, development or improvement of products. The credit expired at the end of 2014, but has been retroactively reinstated and made permanent. There were also some modifications that allow eligible small businesses to claim the credit against alternative minimum tax or the employer’s payroll tax.

Bonus depreciation — this expired at the end of 2014, but is now available for qualified assets acquired and placed in service during the 2015 through 2019 tax years. The bonus depreciation percentage is 50 percent for assets placed in service during 2015 to 2017, 40 percent in 2018 and 30 percent in 2019. The assets must be new or newly constructed and meet additional criteria to qualify for this treatment.

Work opportunity tax credit — this credit is available to employers that hire members of eligible target groups with significant barriers to employment.  The credit expired at the end of 2014, but was retroactively reinstated and extended through 2019. The credit was also modified by adding an additional target group for qualified long-term unemployment recipients.

For individuals:

Enhanced American opportunity credit — this credit is available for certain individuals enrolled in their first four years of postsecondary education.  It was set to expire at the end of 2017, but is now permanent.

Enhanced earned income credit — this credit for certain working taxpayers with earned income has a provision for an increased credit for individuals with three or more qualifying children. This particular provision was set to expire at the end of 2017, but has now been made permanent.

Enhanced child tax credit — the income threshold for determining eligibility for this credit was scheduled to increase to $10,000 at the end of 2017, but is now permanently set at $3,000.

Qualified charitable distributions (QCD) from individual retirement plans — this allows taxpayers at least 70 1/2 years old to make a transfer directly to a qualified charitable organization. QCD count toward required minimum distributions, but aren’t considered taxable income. Those intending to make use of this must take steps to ensure funds never pass through the IRA owners’ hands.

Deduction for state and local general sales tax in lieu of state and local income tax — this provision that allows you to optimize the tax deduction you take on your Schedule A if you itemize expired at the end of 2014. It has been retroactively reinstated and made permanent.

Mortgage insurance premiums treated as qualified residence interest — if you itemize deductions, this allows the inclusion of qualified mortgage insurance premiums.  This provision expired at the end of 2014, but was retroactively reinstated and extended through 2016.

Exclusion from gross income for discharge of up to $2 million of qualified principal residence indebtedness (QPRI) — this allows individuals to exclude canceled debt from income if it meets the criteria to be considered QPRI.  This provision also expired at the end of 2014, but was retroactively reinstated and extended through 2016.

With this act, some of the annual uncertainty that comes with tax planning will be alleviated for taxpayers and the professionals who advise them and should allow for more opportunities to plan throughout the year instead of waiting for legislation to pass in December.

If you have any questions about any of these provisions and how they affect you or your business or to discuss planning opportunities available for 2016, contact a qualified accountant.