In the closing days of calendar year 2015, Congress passed the Consolidated Appropriations Act, 2016, a massive spending bill that kept the federal government funded for fiscal year 2016. Signed into law on December 18, 2015, the legislation included the Protecting Americans from Tax Hikes (PATH) Act of 2015 (Division Q of the Consolidated Appropriations Act). The PATH Act addressed a host of popular tax provisions–commonly referred to as “tax extenders”–that had expired at the end of 2014, and made many of them permanent.
A tax credit of $1,000 is generally available for each qualifying child under the age of 17, though the credit is phased out at higher modified adjusted gross incomes (MAGIs). The credit can offset both regular tax and the alternative minimum tax (AMT). If the allowable credit is greater than total tax liability, an amount equal to 15% of earned income in excess of a specific dollar threshold (originally set at $10,000, indexed for inflation) can be refunded. A series of temporary legislative acts reduced the dollar threshold used to determine the refundable portion of the credit from $10,000 to $3,000, effectively increasing the amount of the credit that could be refunded. The last temporary reduction was set to expire after 2017.
The PATH Act makes the $3,000 threshold permanent for calculating the refundable credit. So, if the tax credit exceeds tax liability it is generally refundable up to 15% of earned income over $3,000. (When the child tax credit becomes refundable, it is called the “additional child tax credit.”)
Families with three or more qualifying children may determine the additional child tax credit using the “alternative formula” if this results in a larger credit than determined under the earned income formula. Under the alternative formula, the additional child tax credit equals the amount by which the taxpayer’s Social Security taxes exceed the taxpayer’s earned income tax credit (EITC).
For tax years 2009 through 2017, the Hope credit was modified and renamed the American Opportunity Tax Credit (after 2017 the original Hope credit rules would again apply). Specifically:
The PATH Act makes the changes described above permanent.
A separate provision within the legislation requires that taxpayers claiming the American Opportunity Tax Credit provide the employer identification number of the educational institution attended by the individual to whom the credit relates, and requires an educational institution to provide its employer identification number on Form 1098-T. This provision is effective for taxable years beginning after December 31, 2015.
Eligibility for the earned income tax credit depends on a number of factors, including earned income, adjusted gross income, investment income, filing status, number of children, and immigration and work status in the United States. If the credit exceeds tax liability, the excess may be refunded.
The PATH Act makes permanent two previous temporary modifications to the credit that were scheduled to expire after 2017:
Up to $250 of unreimbursed annual qualified classroom expenses paid by eligible educators can be deducted as an “above-the line” deduction. Qualifying expenses can include the cost of books, most supplies, computer equipment, and supplementary materials used in the classroom. Teachers, instructors, counselors, principals, and aides for kindergarten through grade 12 are eligible, provided they work a minimum number of hours during the school year.
This provision, which actually expired at the end of 2014, is made permanent for tax years beginning after 2014 (i.e., the provision is retroactively reinstated for tax year 2015).
For tax years beginning after 2015, the PATH Act also indexes the $250 dollar limit for inflation and provides that expenses for professional development will be considered eligible expenses for purposes of the deduction.
Qualified transportation fringe benefits provided by an employer are excluded from gross income for federal income tax purposes. Such benefits include parking, transit passes, vanpool benefits, and qualified bicycle commuting reimbursements. Qualified transportation fringe benefits may also include a cash reimbursement (under a bona fide reimbursement arrangement) by an employer to an employee for parking, transit passes, or vanpooling.
Parity in qualified transportation fringe benefits is permanently extended by increasing the monthly exclusion for employer-provided transit pass and vanpool benefits to the same level as the exclusion for employer-provided parking. This change applies retroactively to months after December 31, 2014. For 2015, the monthly exclusion for employer-provided transit pass and vanpool benefits is increased from $130 to $250. For 2016, the amount is $255.
In order for the extension to be effective retroactively to January 1, 2015, expenses incurred for months beginning after December 31, 2014, and before enactment of the provision, by an employee for employer-provided vanpool and transit benefits may be reimbursed (under a bona fide reimbursement arrangement) by employers on a tax-free basis to the extent they exceed $130 per month and are no more than $250 per month.
Individuals who itemize deductions on Schedule A of IRS Form 1040 can elect to deduct state and local general sales taxes in lieu of the deduction for state and local income taxes. The total amount of state and local sales taxes paid can be calculated by accumulating receipts showing general sales taxes paid or by using IRS tables. If IRS tables are used, in addition to the table amount, a deduction can be claimed for eligible general sales taxes paid on cars, boats, and other specified items.
This provision expired at the end of 2014. The PATH Act retroactively reinstates the provision for the 2015 tax year and makes it permanent.
An individual’s total deductible charitable contributions generally may not exceed 50% of the individual’s contribution base, which is the individual’s adjusted gross income (AGI) disregarding any net operating loss carryback. Contributions of capital gain property to public charities are generally deductible up to 30% of the individual’s contribution base, and contributions of capital gain property to private foundations and certain other charitable organizations are generally deductible up to 20% of the individual’s contribution base.
The PATH Act makes permanent a previously expired provision: Qualified conservation contributions are not subject to the the 30% limitation that would otherwise apply to the contribution of capital gain property by individuals. Instead, individuals may deduct the fair market value of any qualified conservation contribution, subject only to the general 50% limitation. The provision applies retroactively to the 2015 tax year.
The fair market value of the qualified conservation contribution may be deducted to the extent that it doesn’t exceed 50% of the contribution base over the amount of all other allowable charitable contributions. Excess contributions can be carried forward for up to 15 years.
A qualified conservation contribution is a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. A qualified real property interest is defined as: (1) the entire interest of the donor other than a qualified mineral interest, (2) a remainder interest, or (3) a restriction (granted in perpetuity) on the use that may be made of the real property.
Special rules apply to farmers and ranchers.
In addition, for taxable years beginning after December 31, 2015, the act creates special rules for qualified conservation contributions by certain Alaska Native Corporations.
An individual age 70½ or older can make a qualified charitable distribution (QCD) from his or her IRA and exclude the distribution from gross income (up to $100,000 in a year). The distribution must be made directly to a qualified charity and must be a distribution that would otherwise be taxable to the individual. QCDs count toward satisfying any required minimum distributions (RMDs) that would otherwise have to be made from the IRA, just as if the individual had received an actual distribution from the plan. Individuals are not able to claim a charitable deduction for the QCD on their federal income tax returns.
This provision is reinstated for tax years beginning after December 31, 2014, and made permanent.
A credit may be claimed for qualified research expenses. The credit is generally equal to 20% of the amount by which qualified research expenses exceed a base amount for the year. An optional alternative simplified research credit (with a 14% rate and a different base amount) can be claimed instead.
Special rules and calculations also apply for: (1) corporate cash expenses including grants and contributions paid for basic research conducted by universities and certain nonprofit scientific research organizations (“the university basic research credit”), and (2) expenditures on research undertaken by an energy research consortium (“the energy research credit”).
Qualified research expenses eligible for the research tax credit consist of: (1) in-house expenses for wages and supplies attributable to qualified research, (2) certain time-sharing costs for computer use in qualified research, and (3) 65% of amounts paid or incurred by the taxpayer to certain other persons for qualified research conducted on the taxpayer’s behalf (so-called contract research expenses). Notwithstanding the limitation for contract research expenses, qualified research expenses include 100% of amounts paid or incurred by the taxpayer to an eligible small business, university, or federal laboratory for qualified energy research.
To be eligible for the credit, the research not only has to satisfy the requirements of IRC Section 174 (deduction for certain research or experimental expenditures paid or incurred in connection with a trade or business), but also must be undertaken for the purpose of discovering information that is technological in nature, the application of which is intended to be useful in the development of a new or improved business component of the taxpayer, and substantially all of the activities that constitute elements of a process of experimentation for functional aspects, performance, reliability, or quality of a business component.
The PATH Act makes the research credit permanent and retroactively applicable to amounts paid or incurred after December 31, 2014.
For taxable years beginning after December 31, 2015, the legislation modifies the credit:
For purposes of the research credit being able to offset AMT liability, an eligible small business is, with respect to any taxable year, a corporation, the stock of which was not publicly traded; a partnership; or a sole proprietor, if the average annual gross receipts did not exceed $50 million.
A qualified small business, for purposes of electing to apply the research credit against payroll tax, is defined as a corporation (including an S corporation) or partnership (1) with gross receipts of less than $5 million for the taxable year, and (2) that did not have gross receipts for any taxable year before the five taxable year period ending with the taxable year. An individual carrying on one or more trades or businesses also may be considered a qualified small business if the individual meets the conditions set forth in (1) and (2), taking into account aggregate gross receipts with respect to all trades or businesses. A qualified small business does not include an organization exempt from income tax under IRC Section 501.
Under IRC Section 179, small businesses may elect to expense the cost of qualifying property rather than to recover such costs through depreciation deductions. The maximum amount that can be expensed is permanently increased to $500,000. The $500,000 limit is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $2,000,000. The $500,000 and $2,000,000 amounts are indexed for inflation for taxable years beginning after 2015.
In general, qualifying property is defined as depreciable tangible personal property that is purchased for use in the active conduct of a trade or business. The legislation permanently extends a provision allowing off-the-shelf computer software placed in service to be treated as qualifying property.
For taxable years beginning in 2015, qualifying property can include up to $250,000 in qualified real property (i.e., qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property). For taxable years beginning after 2015, the $250,000 limitation on qualified real property is removed.
The PATH Act also makes permanent the ability to revoke an election without the consent of the Commissioner, and allows air conditioning and heating units to be included in the definition of qualified property for taxable years after 2015.
Individuals are generally able to exclude 50% of any capital gain from the sale or exchange of qualified small-business stock acquired at original issue, provided that certain requirements, including a five-year holding period, are met. A temporary increase of the exclusion percentage to 100% applied in 2014, and is now retroactively reinstated for 2015 and made permanent. The exclusion applies for purposes of the alternative minimum tax calculation as well as for regular income tax calculation.
The amount of gain eligible for the exclusion is the greater of (1) 10 times the taxpayer’s basis in the stock or (2) $10 million (reduced by the amount of gain eligible for exclusion in prior years).
To qualify as a qualified small business, when the stock is issued, the aggregate gross assets (i.e., cash plus aggregate adjusted basis of other property) held by the domestic C corporation may not exceed $50 million. The corporation also must meet certain active trade or business requirements.
The Work Opportunity Tax Credit is available to employers hiring individuals from one or more of nine targeted groups. The amount of the credit is generally 40% (25% for employment of 400 hours or less) of qualified wages paid by the employer. Qualified wages are wages (generally, up to $6,000) earned by a member of a targeted group during the one-year period beginning with the day the individual begins work for the employer. In the case of an individual in the long-term family assistance recipient category, the period of time is two years rather than one year. Targeted groups eligible for the credit include: (1) families receiving Temporary Assistance for Needy Families (TANF); (2) qualified veterans; (3) qualified ex-felons; (4) designated community residents; (5) vocational rehabilitation referrals; (6) qualified summer youth employees; (7) qualified supplemental nutrition assistance program benefits recipients; (8) qualified SSI recipients; and (9) long-term family assistance recipients.
In the case of qualified summer youth employees, the maximum credit is $1,200 (40% of the first $3,000 of qualified first-year wages). In the case of long-term family assistance recipients, the maximum credit equals $9,000 (40% of the first $10,000 of qualified first-year wages, and 50% of the first $10,000 of qualified second-year wages).
No credit is allowed for qualified wages paid to employees who work less than 120 hours in the first year of employment.
The credit is not available to qualified tax-exempt organizations other than those employing qualified veterans. Special rules apply in this situation.
The PATH Act retroactively reinstates the Work Opportunity Tax Credit for 2015 and extends it through taxable years beginning on or before December 31, 2019. The legislation also expands the credit to employers that hire individuals who are qualified long-term unemployment recipients after December 31, 2015.
Qualified long-term unemployment recipients are individuals who have been certified by the designated local agency as being in a period of unemployment of 27 weeks or more, which includes a period in which the individual was receiving unemployment compensation under state or federal law.
An additional first-year “bonus” depreciation deduction is allowed equal to 50% of the adjusted basis of qualified property placed in service during the year. The additional first-year depreciation deduction is allowed for both regular tax and the alternative minimum tax. The basis of the property and the regular depreciation allowances in the year the property is placed in service and later years are adjusted accordingly.
The PATH Act retroactively applies 50% bonus depreciation (which expired at the end of 2014) to the 2015 tax year and extends it–with modification–through 2019 (through 2020 for certain longer-lived and transportation property). The bonus depreciation percentage is decreased to 40% in 2018 and 30% in 2019 (for longer-lived and transportation property, the 40% and 30% rates apply to 2019 and 2020 respectively).
Property qualifying for the additional first-year depreciation deduction must meet all of the following requirements:
For years after 2015, the PATH Act also allows additional first-year depreciation for qualified improvement property without regard to whether the property improved is subject to a lease.
The limitation under IRC Section 280F on the amount of depreciation deductions allowed with respect to certain passenger automobiles is increased in the first year by $8,000 for automobiles that qualify (and for which the taxpayer does not elect out of the additional first-year deduction). The $8,000 increase is not indexed for inflation. For property placed in service in 2018, the $8,000 is reduced to $6,400; for 2019, the amount is $4,800.
A corporation otherwise eligible for additional first-year depreciation may be able to claim additional minimum tax credits in lieu of claiming the additional bonus depreciation. Special rules apply to certain plants bearing fruits and nuts.
Generally, debt amounts that are reduced, forgiven, or eliminated as part of a mortgage restructuring or foreclosure are treated as taxable income. Under temporary provisions (effective since 2007), however, taxpayers have been able to exclude from gross income the discharge of debt associated with a qualified principal residence. Specifically, an exclusion is provided for discharges of up to $2 million ($1 million if married filing separately) of qualified principal residence indebtedness–debt incurred in acquiring, constructing, or substantially improving a principal residence. Refinanced qualified principal residence debt that is discharged can also qualify for the exclusion.
The PATH Act extends the exclusion from gross income for discharges of qualified principal residences (which expired at the end of 2014) for two years, through December 31, 2016. The legislation also provides for exclusion of income in cases where qualified principal residence indebtedness was discharged on or after January 1, 2017, if the discharge was pursuant to a binding written agreement entered into prior to January 1, 2017.
Premiums paid or accrued for qualified mortgage insurance associated with the acquisition of a main or second home may be treated as deductible qualified residence interest on Schedule A of IRS Form 1040. The amount that would otherwise be allowed as a deduction is reduced if adjusted gross income (AGI) exceeds $100,000 ($50,000 if married filing separately), and no deduction is allowed if AGI exceeds $109,000 ($54,500 if married filing separately).
The PATH Act extends the deduction for private mortgage insurance premiums for two additional years, allowing the deduction for amounts paid or accrued in 2015 and 2016.
Individuals may claim an above-the-line deduction for qualified higher-education expenses paid during the year. Qualified expenses include tuition and fees paid for enrollment in a degree or certificate program at an accredited post-secondary educational institution for the individual, the individual’s spouse, or a dependent. The deduction doesn’t include payments made for meals, lodging, insurance, transportation, or other living expenses. The maximum deduction is $4,000. Individuals with adjusted gross incomes (AGIs) exceeding $65,000 ($130,000 for married individuals filing jointly) can claim a maximum deduction of $2,000, and individuals with AGI greater than $80,000 ($160,000 if married filing jointly) can’t claim the deduction at all.
The legislation extends the qualified tuition deduction for two additional years, making it available for 2015 and 2016.
The expenses must be in connection with enrollment at an institution of higher education during the taxable year, or with an academic period beginning during the taxable year or during the first three months of the next taxable year.
The amount of qualified tuition and related expenses must be reduced by certain scholarships, educational assistance allowances, and other amounts paid for the benefit of such individual, and by the amount of such expenses that have been paid with tax-free interest on U.S. savings bonds. No deduction can be claimed for expenses that have been used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or a qualified tuition program (QTP). For a QTP, this applies only to the amount of tax-free earnings that were distributed, not to the recovery of contributions to the program. No deduction is allowed with respect to an individual for whom an American Opportunity or Lifetime Learning Tax Credit is elected for such taxable year.
Individuals who file married filing separately, or who can be claimed as a dependent on another individual’s federal income tax return, cannot claim the deduction.
The credit is the sum of two amounts:
The maximum (total lifetime) credit for all taxable years is $500, and no more than $200 of such credit may be attributable to expenditures on windows.
The PATH Act extends the credit for two years, making the credit applicable to tax years 2015 and 2016.
The legislation makes the following modifications to the rules that govern Section 529 plans:
These changes are effective for tax years beginning after 2014.
Example from Joint Committee on Taxation, Technical Explanation of the Revenue Provisions of the Protecting Americans from Tax Hikes Act of 2015, House Amendment #2 to the Senate Amendment to H.R. 2029 (Rules Committee Print 114-40), (JCX-144-15), December 17, 2015:
Assume that two designated savings accounts have been established by the same account owner within the same qualified tuition program for the same designated beneficiary. Account A contains $20,000, all of which consists of contributed amounts (i.e., it has no earnings). Account B contains $30,000, $20,000 of which constitutes an investment in the account, and $10,000 attributable to earnings on that investment. Assume a taxpayer were to receive a $10,000 distribution from Account A, with none of the proceeds being spent on qualified higher education expenses. Under present law, both of the designated beneficiary’s accounts would be aggregated for purposes of computing earnings. Thus, $2,000 of the $10,000 distribution from Account A ($10,000 multiplied by $10,000/$50,000) would be included in the designated beneficiary’s income. Under the provision, the accounts would not be aggregated for purposes of determining earnings on the account. Thus, because Account A has no earnings, no amount of the distribution would be included in the designated beneficiary’s income for the taxable year.
ABLE accounts are tax-favored savings vehicles intended to benefit disabled individuals. For taxable years beginning after December 31, 2014, the legislation eliminates the requirement that ABLE accounts may be established only in the state of residence of the ABLE account owner.
The rules that govern SIMPLE IRAs prevent distributions from employer-sponsored retirement plans and IRAs from being rolled over to a SIMPLE IRA. And distributions from a SIMPLE IRA during the two-year period beginning on the date the employee first participated in the SIMPLE IRA may be rolled over only to another SIMPLE IRA.
The PATH Act permits rollovers of distributions from employer-sponsored retirement plans and traditional IRAs (that are not SIMPLE IRAs) into a SIMPLE IRA after the expiration of the two-year period following the date the employee first participated in the SIMPLE IRA (the two-year period during which the additional income tax on distributions from a SIMPLE IRA is 25% instead of 10%).
This change is effective for SIMPLE IRA contributions made after December 18, 2015.
The PATH Act makes a number of changes affecting real estate investment trusts (REITs), including:
Special rules apply in determining whether two or more tax-exempt organizations are members of a group under common control, and therefore treated as a single employer for purposes of an employer-sponsored retirement plan.
Among other changes, the legislation provides that for purposes of applying the controlled group rules with respect to employers that are organizations eligible to maintain church plans, the general rule is that two organizations are not aggregated and treated as a single employer unless two conditions are satisfied:
Notwithstanding the general rule, an organization that is a nonqualified church-controlled organization is aggregated with one or more other nonqualified church controlled organizations or an organization that is not a tax-exempt organization and thus treated as a single employer if at least 80% of the directors or trustees of the other organization or organizations are either representatives of, or directly or indirectly controlled by, the first organization.
Historically, contributions to IRC Section 501(c)(3) charitable organizations and certain other organizations have not been subject to federal gift tax.
The PATH Act creates a gift tax exemption for qualified gift contributions to tax-exempt IRC Section 501(c)(4) organizations (generally, social welfare organizations), 501(c)(5) organizations (generally labor and agricultural organizations), and 501(c)(6) organizations (generally trade associations and business leagues) as well. This is effective for gifts made after December 18, 2015.
This is the so-called “Cadillac tax” on high-cost employer-sponsored health-care plans that was scheduled to be effective after December 31, 2017. The legislation postpones implementation of the tax for two years–it will now apply to tax years beginning after December 31, 2019.