Congress Agrees on a New Tax Deal

Just in time for year end, on December 18th the President signed an agreement passed by Congress to extend all tax incentives that were set to expire at the end of the year as part of the Protecting Americans from Tax Hikes Act of 2015. This act does a lot more than just routinely extend tax incentives as in the past. Many of these “tax extenders” are made permanent, others are extended for several years, while the rest are extended for two years retroactive to the beginning of 2015. Considering that many provisions were made permanent or extended for several years, this will allow for more proactive planning by taxpayers throughout the year and avoidance of rushing decisions at year end. The tax deal was brokered along with a government omnibus funding agreement in negotiations between the White House and congressional leaders of both parties.

Some of the popular tax incentives for businesses in the tax deal include:

  • The Section 179 provision permanently extends the small business expensing limitation and phase-out amounts of certain real property back to the levels that were in effect from 2010 to 2014– $500,000 and $2 million, respectively. Beginning in 2016, both the $500,000 and $2 million limits will be indexed for inflation each year.
  • The extensions of bonus depreciation for five years for new property acquired and placed in service during 2015 through 2019. The bonus depreciation percentage is 50 percent for property placed in service during 2015, 2016, and 2017 and phases down to 40 percent in 2018, and 30 percent in 2019.
  • The permanent extension of the research and development (R&D) tax credit. Additionally, beginning in 2016 eligible small businesses may claim the credit against alternative minimum tax (AMT) liability. Additionally, qualified startups with zero tax liability may be able to claim against the employer’s payroll tax (i.e., FICA) liability.
  • Renews permanently the rule that an S corporation must hold its assets for five years (rather than 10 years) following conversion from a C corporation to avoid the tax on built-in gains.
  • The permanent extension that allows retailers and restaurant owners to depreciate remodeling and other improvements to their stores over 15 years rather than the previous standard of 39 years.

Some of the popular tax incentives for individuals in the tax deal include:

  • Permanent extension of The American Opportunity Tax Credit of $2,500 for four years of post-secondary education, and increasing the beginning of the phase-out amounts to $80,000 (single) and $160,000 (married filing jointly).
  • Permanently extends the above-the-line deduction for qualified tuition and related expenses through 2016.
  • Permanently extends the above-the-line deduction (capped at $250) for the eligible expenses of elementary and secondary school teachers. Beginning in 2016, the provision also modifies the deduction to index the $250 cap each year.
  • Permanently extends the ability of individuals at least 70½ years of age to exclude from gross income qualified charitable distributions from an IRA of up to $100,000 per taxpayer per tax year.
  • Permanently extends the amount of the child tax credit that may be refunded to 15% of earned income above the $3,000 threshold, a reduction from the $10,000 threshold and allowing taxpayers to receive a greater refund.
  • Makes permanent the sales tax deduction which benefits taxpayers in the seven states that do not have a state income tax.
  • Extends the tax credit for manufacturers of energy-efficient residential homes to claim a tax credit of $1,000 or $2,000 for construction that meet qualifying criteria.

Another provision to note from the tax deal is the two year delay of the so-called “Cadillac tax” on high-priced health insurance plans. As part of the Affordable Care Act, this was supposed to begin in 2018 and now is extended to 2020.

The cost of the new tax deal is approximately $620 billion over the next 10 years. However, most see the deal as a positive for taxpayers. “The most positive aspect of this extender package is that many of the perennially expiring provisions are either made permanent, or at least pushed off beyond another New Year’s morning expiration,” says Paul Gevertzman in AccountingToday. “What it means for businesses is that they can now plan properly. They can operate with the knowledge that if they follow the prescribed steps they can achieve the anticipated tax result… This bill takes the guesswork out of the equation. This certainty allows tax incentives to actually incentivize businesses to spend, rather than to simply provide a benefit to businesses post facto for what they’ve already done.”

View a complete copy of the bill text or a section-by-section summary of the legislation.