On a Steady PATH: Tax Extenders Act Ends Uncertainty
Making select tax provisions permanent has eased the burden on many corporate and individual tax payers.
Tax professionals and CPAs breathed a collective sigh of relief in late 2015 as Congress authorized the 233-page tax bill that became the Protecting Americans from Tax Hikes (PATH) Act. Part of the Omnibus Appropriations legislation, the PATH Act most notably makes permanent many previously temporary tax breaks for both corporate and individual taxpayers, and extends or introduces important tax provisions.
In addition to PATH, there were other tax legislation changes afoot at the end of 2015. The Fixing America’s Surface Transportation (FAST) Act includes tax-related provisions as does the Bipartisan Budget Act of 2015.
What do these changes mean for corporate and individual taxpayers and the companies and clients they serve? Let’s walk through some of the highlights.
The good news for corporate taxpayers
For the corporate tax department, the good news is that many temporary tax provisions were made permanent. This eases the burden, particularly for those companies operating on a fiscal year basis, of recalculating tax positions based on whether or not certain provisions were extended at the last minute. Tax provisions extended or made permanent include:
- Bonus Depreciation Rules: Arguably the most important tax extender is bonus depreciation, which was not made permanent, but extended through 2019. Businesses can depreciate 50 percent of the cost of equipment acquired and put into service during 2015, 2016, and 2017. Bonus depreciation phases down to 40 percent in 2018 and 30 percent in 2019.
- The Research and Development (R&D) Tax Credit: The R&D tax credit is now permanent and retroactive to the 2015 tax year. It also significantly enhances the credit. For instance, it now allows an offset to both payroll taxes and the alternative minimum tax (AMT) for small businesses.
- Section 179 Expensing and Deduction: The deduction allowing small businesses to deduct investments was made permanent, while expanding the expensing limit to $500,000. The limits will also be indexed to inflation.
- The Cadillac Tax: A two-year congressional moratorium has been placed on the Cadillac tax, a tax on expensive health plans. PATH delays the effective date for the tax until 2020.
Individuals get permanent benefits, too
CPAs and tax professionals no doubt took notice of the tax extenders made permanent in the PATH Act for individuals and families:
- Earned Income Tax Credit (EITC): The credit has been permanently enhanced, allowing for an increased credit for those with three or more children, and a reduction in the marriage penalty.
- American Opportunity Credit(AOC): The AOC, which permits a credit up to $2,500 for education expenses, was made permanent.
- Child Tax Credit: The threshold for determining the refundable portion of the child tax credit was made permanent.
- Tax-Free Charitable Distributions: A popular extender for seniors who are at least 70½ is the provision allowing them to distribute money directly from an IRA or Roth IRA to a charitable organization without facing taxes. Now that it’s permanent, seniors don’t have to scramble at the last minute to plan their finances.
Offsetting the benefits
Not all of the provisions in the PATH Act are welcome changes for taxpayers and tax professionals. For example, PATH includes provisions that raise or expand penalties for both taxpayers and tax preparers. The PATH Act also significantly modifies the tax rules applicable to real estate investment trusts (REITs).
Also, while most U.S. states will eventually adopt the new federal tax provisions, tax professionals will need to pay close attention to the laws of each state where taxpayers are required to file, in order to determine which provisions are adopted into the state tax code and when.
Keeping up with legislative changes
With many varying tax provisions in the PATH Act, it’s one of the most consequential pieces of tax legislation to be enacted in recent memory. Bloomberg Tax Technology customers had an immediate advantage, as both Income Tax Planner™ and Fixed Assets were quickly updated to support the changes and extensions of the PATH Act, making it possible for these tax and financial professionals, to provide their clients or companies with the most accurate and up-to-date planning, calculations, and reporting.