PATH Act gives tax planners a measure of certainty
The December signing of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) delivered more than 50 permanent and semi-permanent extenders for individuals and businesses, and certainty to the tax planning community.
Signed with the FY 2016 Omnibus, the legislation is considered significant thanks to its enhancements of a number of tax provisions and its impact on several components of the Affordable Care Act.
Retroactive for 2015 and effective this year, key business extenders include:
- Permanent Code Sec. 179 expensing
- Permanent Research Tax Credit
- Five-year bonus depreciation with a phase-down schedule
- Work Opportunity Tax Credit
In the accounting world, that means financial and tax planning that hinged on “hoped for” renewals have given way to concrete provisions. For the past four years, those extenders have not been passed until December, leaving CPAs like Jim Selsor to qualify their advice under the possibility of a provision not being renewed.
“It removes one less variable when you’re planning,” said Selsor, a partner at accounting firm Gunnip & Company in Wilmington. “The issue was that you couldn’t adequately plan to minimize your taxes because you were not sure what was the law in effect was.”
Cameron McDonald, office managing partner for tax services at BDO’s Wilmington office agrees.
“I’m just surprised this one is so tax payer and business friendly,” said McDonald, who said previous years would find congress working down to the wire, and CPAs wringing their hands. “For right now there’s a lot in there for business and individuals.”
Code Sec. 179 expensing is a prime example. The permanent extender raises the expensing limit from $25,000 and an investment limit of $200,000 to a limit of $500,000 with a $2 million investment limit.
“Before this a businesses didn’t know if they could write up to $500,000 in equipment or $5,000,” said Selsor. “This allows us to effectively tax plan in January as opposed to hoping in December they would extend the one provision that would minimize your taxes.”
Intangible property like off-the-shelf software as well as air conditioning and heating units are also included under the provision.
The Research Tax Credit was also included as a permanent extender. Since 1985, this research and development provision had expired eight separate times and been extended 15 times, according to Selsor.
Available to business- and university-based research with qualified research expenditures, the Research Tax Credit permanently extends the credit and increases the alternative simplified credit from 14 percent to 20 percent.
McDonald said his firm is alerting clients to provisions like the Research Tax Credit and the way it could change up financial planning and tax season and said the credit has many implications for small business as well as big players in manufacturing and distribution.
The extender also allows small businesses to claim the credit against their Alternative Minimum Tax (AMT) or take the credit against their payroll taxes.
The PATH Act also includes a bonus depreciation extension as part of a phase-down schedule from 50 percent for 2015 to 2017, to 30 percent in 2019.
Other five-year extensions for business include a Work Opportunity Tax Credit, a provision eligible to veterans and nonveterans who begin work for an employer before Jan. 1, 2020. It also offers a 40 percent credit of the first $6,000 of wages to employers who hire qualified long-term unemployed individuals.
Several provisions under the Affordable Care Act were also impacted, including a moratorium on the 2.3 percent excise tax for medical devices; a two-year delay for its more expensive “Cadillac” plan; and a moratorium of one year on the ACA’s health insurance provider fee.
For individuals, the Path Act includes permanent extensions that range from a teacher’s classroom expense deduction to charitable distributions from IRAs. That Act extends the provision for individuals 70 Â½ and older who make tax-free distributions from their individual retirement accounts.
“That’s a winner,” said George H. Skinner, a CPA in Newark. “Every year I get calls from clients who say they want to something out of their retirement program and I tell them we can do it, and then we see what happens.”
Like Selsor, Skinner said whittling down the adjusted gross income for his clients is goal.
“It’s important because it will allow the tax payer to reduce their adjusted gross income and give the individual a charitable deduction even if they don’t itemize their tax returns,” said Selsor.
Selsor said while the extenders are significant, he’s not certain whether it signals a real overhaul of the tax code.
“Nothing’s certain in the tax code,” said Selsor. “This gives some normalcy for the next two years and then once a new president and congress has been I office for a year”¦ we’ll see what happens.”
WHAT THE LEGISLATION MEANS
The PATH Act at a Glance
- More than 100 separate provisions
- $622 billion tax break package
- IRS reforms (prohibits IRS employees from using personal e-mail for official business and requires truncated Social Security numbers on W-2 forms)
Extenders for Individuals
- State and local sales tax deductions
- Child care tax credit
- Earned Income Credit
- Qualified tuition deduction (two-year extender)
- Mortgage debt exclusions (two-year extender)
Extenders for Business
- Code Sec. 179 Expensing
- Research tax credit
- Bonus depreciation with a phase-down schedule