Tax Extenders Made Permanent
December 18, 2015
As you’re probably aware, many important business tax incentives have been expired since December 31, 2014. Among the provisions that have been dead for nearly a year are the R&D credit, bonus depreciation, and enhanced Section 179 write-offs of asset acquisitions. As for individuals, they lost the itemized deduction for state and local sales taxes in lieu of income taxes and the exclusion for cancellation of debt income related to primary residences.
The practice of letting these provisions expire, then retroactively reinstating them, has been occurring on a regular basis for quite some time. The most significant problem with this system has been that taxpayers and practitioners were unable to plan appropriately for large purchases or investing in R&D. This year, however, is different.
Business Provisions Made Permanent
- R&D Credit: businesses, rejoice! The biggest ticket item of all the 52 extenders has finally been made permanent, as well as bigger and better. Beginning in 2016, businesses with less than $50 million in gross receipts will be free to use the credit to offset alternative minimum tax. In addition, certain start-up businesses that may not have an income tax liability will be able to offset payroll taxes with the credit.
- Enhanced Section 179 deductions: In recent years, taxpayers have been entitled to immediately deduct up to $500,000 of the cost of qualifying asset acquisitions (with a phase-out beginning at $2 million). These thresholds were due to plummet to $25,000 and $200,000 respectively, beginning on January 1, 2015. The new deal retains Section 179 at the higher limits, while indexing them for inflation in future years. Taxpayers will continue to be eligible to apply Section 179 to purchases of computer software and qualified leasehold, retail, and restaurant improvements (see immediately below).
- Abbreviated 15-year life of qualified retail, restaurant, and retail improvements: the shortened 15 — rather than 39 — year recovery life of these three types of assets has been made permanent.
- 100% exclusion on Section 1202 stock: Allows a taxpayer who sells qualifying small business stock held for longer than 5 years to exclude part of the gain — increased the exclusion from 50% to 100% (subject to limitations). This 100% exclusion was made permanent for stock, bringing great relief to investors who acquired QSBS stock in 2015.
- Reduction in S corporation built-in gains recognition period: While this change is unlikely to garner much press, it is extremely meaningful to owners of C corporations who have contemplated making an election to be taxed as an S corporation, as the corporation will now only be subject to corporate-level tax on the disposition of appreciated assets owned at the conversion date for five years, rather than the ten under previous law.
Individual Provisions Made Permanent
- Enhanced American opportunity tax credit: From 2009 through 2017, taxpayers have been entitled to a $2,500 credit for four years of post-secondary education, with phase-outs beginning at $80,000 (if single) and $160,000 (if married filing jointly). In 2017, however, the credit was slated to return to an $1,800 annual maximum with lower phase-out thresholds. This deal makes the enhanced credit a permanent fixture in the law.
- Itemized deduction for state and local sales taxes in lieu of income taxes were made permanent, as was the parity between employer-provided fringe benefits for employee parking and employer-provided fringe benefits for a mass transit parking pass.
- Teachers will now be able to rest easy, knowing that each year they will be entitled to the generous $250 deduction for K-12 supplies. Even better, the deduction will finally be indexed for inflation, meaning educators will really be able to splurge in 2016, perhaps receiving as much as a $257 tax deduction in exchange for molding the minds of America’s youth.
- Charitable giving incentives: the bill permanently extends the following provisions encouraging charitable donations.
- deduction allowed for charitable contribution of real property for conservation purposes
- taxpayers over 70 1/2 may make donations directly from an IRA and will not be taxed on the amounts (up to $100,000),
- a shareholder in an S corporation will be required to reduce his basis in the S corporation’s stock under Section 1366 only for his share of the basis of property contributed by the S corporation; not the fair market value.
If you have any questions, please do not hesitate to contact the office at 541.388.7888. Stay up on tax news and updates by following us on Facebook and Twitter.
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