PORTLAND, Maine (December 21, 2015) - On December 18, 2015, just prior to recessing for the holiday, Congress and the President passed legislation preserving many of the tax cuts and permanently extending other tax provisions. Details of the tax extenders bill are still being analyzed and publicized, but the following summary is based on information available as of December 21, 2015.
This legislation differs from previous tax extender bills because a number of the provisions have been made permanent. Another group of the tax items were extended for five years. The following is a summary of the most popular tax extenders, which are now (once again) law:
For Businesses
Extensions made permanent:
- Code Section 179 expensing - Pre-Act, the dollar limit for Code Sec. 179 expensing for 2015 had reverted to $25,000 with an investment limit of $200,000. The Act permanently sets the Code Sec. 179 expensing limit at $500,000 with a $2 million overall investment limit before phase out (both amounts indexed for inflation beginning in 2016).
- Research & Development tax credit - The research and development (R&D) tax credit is available to taxpayers with specified increases in business-related qualified research expenditures and for increases in payments to universities and other qualified organizations for basic research. The Act permanently extends the credit and increases the alternative simplified credit from 14 percent to 20 percent.
- 100% gain exclusion on qualified small business stock - The 100-percent exclusion allowed for gain on the sale or exchange of qualified small business stock held for more than five years by non-corporate taxpayers is made permanent.
- Reduced recognition period for S Corporation built-in gains tax - The Act makes permanent the five-year recognition period for built-in gain following conversion from a C to an S corporation.
Five-year extensions:
- Bonus depreciation - The Act extends bonus depreciation (additional first-year depreciation) under a phase-down schedule through 2019:
• at 50 percent for 2015-2017;
• at 40 percent in 2018; and
• at 30 percent in 2019.
The Act also continues the election to accelerate the use of AMT credits in lieu of bonus depreciation and increases the amount of unused AMT credits that may be claimed in lieu of bonus depreciation. Additionally, the Act modifies bonus depreciation to include qualified improvement property, and permits certain trees, vines and plants bearing fruits or nuts to be eligible for bonus depreciation when planted or grafted.
- Work opportunity tax credit - The Work Opportunity Tax Credit (WOTC) is extended through 2019. The Act also enhances the WOTC for employers that hire certain long-term unemployed individuals.
- New markets tax credit - The Act authorizes the allocation of $3.5 billion of new markets tax credits for each year from 2015 through 2019.
Two-year extensions:
- Energy-efficient commercial buildings deduction - The Act extends through 2016 the deduction for energy-efficient commercial buildings. Additionally, the Act updates the energy-efficient standards.
For Individuals
Extensions made permanent:
- State and local sales tax deduction - The election to claim an itemized deduction for state and local general sales taxes, in lieu of deducting state and local income taxes, expired after December 31, 2014. The Act makes the election permanent.
- American Opportunity tax credit - The Act makes permanent the American Opportunity Tax Credit (AOTC), an enhanced version of the Hope education credit. The AOTC has been available at an increased level of $2,500, with adjusted gross income (AGI) phase-out amounts of $80,000 (single) and $160,000 (married filing jointly). The AOTC had been scheduled to expire after 2017.
- Child tax credit - The Act makes permanent the reduced earned income threshold amount of an un-indexed $3,000. This provision had been scheduled to expire after 2017.
- Earned income credit - The Act makes permanent the increase ($5,000) in phaseout amount for joint filers, scheduled to expire after 2017. The Act also makes permanent the increased 45 percent credit percentage for taxpayers with three or more qualifying children. Under prior law, both enhancements had been available only through 2017.
- Teachers' classroom expense deduction - The Act permanently extends the above-the-line deduction for elementary and secondary-school teachers' classroom expenses. It also modifies the deduction by indexing the $250 ceiling amount to inflation beginning in 2016. Additionally, the Act includes "professional development expenses" within the scope of the deduction.
- Charitable distributions from IRAs - The Act permanently extends the provision for individuals age 70 1/2 and older to be allowed to make tax-free distributions from individual retirement accounts (IRAs) to a qualified charitable organization. The treatment continues to be capped at a maximum of $100,000 per taxpayer each year.
Two-year extensions:
- Qualified tuition/related-expenses deduction - The Act extends through 2016 the above-the-line deduction for qualified tuition and fees for post-secondary education.
- Mortgage debt exclusion - The Act excludes from income cancellation of mortgage debt on a principal residence of up to $2 million ($1 million for a married taxpayer filing a separate return) through 2016. The Act also modifies the exclusion to apply to qualified principal residence indebtedness discharged in 2017 if discharge is made under a binding written agreement entered into in 2016.
- Mortgage insurance premium deduction - This measure treats mortgage insurance premiums as deductible interest that is qualified residence interest subject to AGI phaseout. The Act extends this special treatment through 2016.
For Businesses and Individuals
Two-year extensions:- Residential energy property credit - The Act extends through 2016 the Code Sec. 25C residential energy property credit. Qualified Code Sec. 25C property includes adding insulation, energy efficient exterior windows and energy efficient heating and air conditioning systems The Act allows a credit of up to 10 percent of qualifying expenses, capped at $500.
For more information, visit Albin, Randall & Bennett.
