It’s official! The House, Senate, and President passed the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), which includes momentous tax breaks and incentives for taxpayers. Included in this legislation are over 20 vital permanent provisions that will benefit individuals and businesses alike, including a permanent R&D credit, Section 179 deduction, and the American Opportunity Tax Credit.
Other pieces of this landmark legislation include the extension of certain provisions for 5 years and expanding the benefits of other provisions included in the bill. So what does all this mean for you or your business? Let me guide you through some of the key points of legislation:
• The $250 maximum above the line deduction for teachers is permanently extended for eligible expenses.
Meaning: All classroom expenses and professional development expenses related to the curriculum can decrease taxable income by a maximum of $250.
• The American Opportunity Tax Credit (AOTC) providing students with a tax credit of up to $2,500 per year for the first 4 years of post-secondary education.
Meaning: High-income taxpayers phase out of the tax credit at a relatively low threshold, which opens up an opportunity for their child in college to receive the credit. Proper tax planning can ensure your family receives the $2,500 credit and the college student probably wouldn’t mind the extra spending money either!
• The definition of qualified education expenses under a 529 plan has been expanded to include computer equipment and technology.
Meaning: The tax-free money you’ve been stashing away for your child’s education has traditionally been used on tuition, books, and other supplies. Now you can utilize that money to purchase computers, I-Pad’s, printers, and other electronics to give them the resources they need to succeed.
• Permanent extension of individuals over 70½ years of age to exclude up to 100K each tax year from gross income when qualified charitable distributions are made directly from an IRA.
Meaning: Individuals who take required minimum distributions (RMD) from their IRA may elect to donate up to $100,000 of that RMD to a qualified charity and exclude the distribution from gross income, resulting in lower taxable income.
• The research & development credit is permanently extended, including the ability to apply a credit against an alternative minimum tax liability and the use by certain small businesses as a credit against payroll tax liability.
Meaning: Innovation is a vital resource for the U.S. economy to remain competitive on a global scale. The R&D credit incentivizes manufacturers, software developers, and other U.S. based businesses to push the limits on technological development with a significant income tax credit based on qualified R&D expenditures.
• Qualified leasehold improvements, qualified restaurant building and improvement, and qualified retail improvements are eligible for a 15-year recovery period, which was permanently extended.
Meaning: The 15-year recovery period speeds up the depreciable life of qualified assets resulting in a larger depreciation deduction and less taxable income.
• Section 179 business expensing limitation and phase-out limits is permanently extended to $500,000 and $2,000,000, respectively. There will be periodic adjustments to these amounts based on future inflation.
Meaning: Businesses rejoice! There is no more waiting for congress to pass the extender bill to determine if the section 179 deduction will remain at $25,000 or be increased to $500,000. Section 179 allows businesses to purchase equipment and immediately 100% depreciate that equipment up to $500,000. This has a huge effect on taxable income at year-end and now we know the deduction is here to stay!
• Extension of exclusion of 100 percent of gain on certain small business stock.
Meaning: On a regular basis, you see young entrepreneurs selling their start-ups for big money. The government has extended a law that allows qualified small businesses to exclude 100% of the gain on sale of stock held for more than 5 years, meaning more money in their pocket and less in Uncle Sam’s.
• Permanent extension of reduced S-Corporation recognition period for built-in gains (BIG) tax.
Meaning: C-Corporations that convert to an S-Corporation cannot immediately sell their assets and avoid double taxation as a C-Corporation. The holding period was initially 10 years to avoid the BIG tax but has been permanently reduced to 5 years.
• Provision for bonus depreciation is extended through 2019 but is phased out every year. The deduction for 2015, 2016, and 2017 will be 50% and reduced every year thereafter by 10%.
Meaning: Bonus depreciation allows businesses to immediately depreciate 50% of the purchase price of a new asset. This provision extension will help with year-end tax planning and help stimulate the economy by increasing the incentive to purchase new equipment.
• Work opportunity tax credit (WOTC) and new markets tax credit extended for 5 years.
Meaning: WOTC incentivizes employers to hire military veterans, unemployed, and low-income individuals by giving businesses a tax credit for the wages paid. The new markets tax credit will give a tax credit to businesses who invest in low-income communities which will also help create jobs for low-income families.
The PATH act could not have come at a better time with the holiday season. Both individuals and businesses can enjoy the benefits of the $620 Billion extender package and utilize some of the key points mentioned above to minimize taxable income and plan ahead for future years.
However, this is not a complete list of the tax benefits that were extended. Please contact MKS&H for more details about this legislation and how they may apply to your unique income tax situation.
Article contributed by Shawn Burman, MKS&H Tax Senior
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.
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