As the year comes to a close, it is a good time to revisit the federal tax landscape to review what breaks were either expanded through 2016 or made permanent as a result of the Protecting Americans from Tax Hikes (PATH) Act of 2015. Also, keep in mind that several tax due dates have changed as a result of the Highway Trust Fund (HTF) extension signed into law in 2015.
The PATH Act
The PATH Act made the American Opportunity Tax Credit permanent and extended the tuition and fees deduction for individuals through 2016. These breaks are subject to phaseouts based on income level. While it is possible to claim the credit and the deduction in the same year, they cannot both be claimed for the same student. If the parents’ income is too high, the child may be eligible. The act also permanently treats computer equipment and Internet service as qualified expenses for Section 529 savings plans.
The option for individuals to deduct state and local sales taxes rather than state and local income taxes paid was permanently extended. This would be most beneficial to taxpayers in locales with low or no state or local income taxes, or to those who made large purchases during the year.
The PATH Act made permanent the ability for taxpayers age 70½ or older to transfer up to $100,000 directly from an IRA to a charity without any tax consequences. The taxpayer cannot claim a charitable deduction for the transfer, but the payouts aren’t taxable either.
Real estate owners can deduct the value of a “conservation easement” made to a charity that preserves a property in its original condition. Such a deduction is limited to 30 percent of the taxpayer’s adjusted gross income (AGI), but under enhancements made permanent by the act the deduction threshold is raised to 50 percent of AGI (100 percent for farmers and ranchers) for conservation easements.
A credit is available for up to 10 percent of the cost of qualified energy-saving improvements. There are various requirements to qualify for the credit, and there is a lifetime credit limit of $500. To date, this credit has been extended only through 2016.
The PATH Act preserved the generous limits for both the Section 179 expensing election and bonus depreciation. For 2016, the maximum Section 179 deduction is $500,000, subject to a $2,010,000 phaseout threshold. These amounts are now permanent and subject to inflation indexing. Additionally, for 2016 and 2017, a business may be able to claim 50 percent bonus depreciation for qualified costs in excess of what is expensed under Section 179. Bonus depreciation is scheduled to be reduced to 40 percent in 2018 and 30 percent in 2019 before it expires on Dec. 31, 2019.
The 15-year recovery period for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements has been reinstated and made permanent. However, there are certain related-party rules for qualified improvements. The research credit was finally made permanent by the PATH Act. The credit is generally equal to 20 percent of qualified research expenses over a base amount, determined using a historical average of research expenses as a percentage of revenues. An alternative computation is available for companies that have not increased their research expenses substantially over their historical base amounts. To qualify, research activities must meet certain criteria.If a corporation needs an influx of capital they may want to consider issuing qualified small-business stock (QSBS). As long as certain requirements are met, 100 percent of the gain from a subsequent sale of QSBS will be tax-free to the investor. The 100 percent exclusion window was set to expire at the end of 2014, but the PATH Act essentially made it permanent. A business may claim the Work Opportunity credit for hiring a worker from a target group, such as Supplemental Nutrition Assistance Program recipients and certain veterans. This credit is available through 2019. Generally, the maximum Work Opportunity credit is $2,400 per worker, but it is higher for workers from certain target groups.
Highway Trust Fund Extension
When the Highway Trust Fund extension was signed, many due dates changed for tax year 2016 (calendar year returns). Here are some you should be aware of:
- Form 1120 – Due April 15; extension to Sept. 15
- Form 1065 – Due March 15; extension to Sept. 15
- Form 1041 – Still due April 15; extension to Sept. 30
- FinCEN 114 (FBAR) – Due April 15; extension to Oct. 15
- Form 990 – Still due May 15; extension to Nov. 15
The following due dates remain unchanged:
- Form 1120S – March 15; extension to Sept. 15
- Form 1040 – April 15; extension to Oct. 15
- Form 5500 – July 31; extension to Oct. 15
Daria D. Palaschak, CPA, CAP, is a tax partner with Sisterson & Co. LLP in Pittsburgh and a member of the
Pennsylvania CPA Journal Editorial Board. She can be reached at firstname.lastname@example.org.