Protecting Americans from Tax Hikes Act of 2015 (PATH)

The new legislation, the Protecting Americans from Tax Hikes (PATH) Act of 2015, retroactively reinstates for 2015 the tax extenders that were renewed for 2014 and then expired at the end of 2014.

In 2015 many of the provisions are made permanent including: the qualified charitable distribution (QCD) rules for making charitable contributions from an IRA for those over age 70 ½; the American Opportunity Tax Credit for college; the Child Tax Credit; the Earned Income Credit; the above-the-line deduction for teachers who buy school supplies; the charitable deduction of contributions of real property for conservation purposes; the Research and Development Tax Credit; Section 179 expensing; the tax break for mass transit and parking benefits; and the deduction for state and local sales taxes, to name several. It also extends the rule reducing to five years (rather than 10 years) the period for which an S corporation must hold its assets following conversion from a C corporation to avoid the tax on built-in gains.

As far as health care provisions, the legislation suspends the 2.3% excise tax on medical devices through 2017 which will now not apply to sales during 2016 and 2017 and delays for two years the “Cadillac tax” on high-priced health insurance plans that was supposed to begin in 2018. The “Cadillac tax” is now effective for tax years beginning after Dec. 31, 2019. The provision imposes a 40% nondeductible excise tax on the amount by which the monthly cost of an employee’s “applicable employer-sponsored coverage” exceeds statutory dollar limits. The act also puts a one-year moratorium on the Patient Protection and Affordable Care Act’s annual fee on health insurance providers, which applies to any covered entity engaged in the business of providing health insurance for U.S. health risks.

However, not all tax extenders provisions were made permanent: it phases out the 50% bonus depreciation for businesses and the work opportunity tax credit.

The legislation also includes a few minor modifications: an expansion of how qualified distributions from section 529 plans can be used, and the elimination of the in-state-plan requirement for the coming new 529-ABLE plans for disabled beneficiaries.

Below is a more thorough outline of what was extended:

Permanent extenders for individuals:

Child tax credit: The threshold amount for determining whether a taxpayer is eligible for the refundable (or additional) child tax credit is permanently set at $3,000 (not indexed for inflation). That amount has been the threshold since 2009, but it was scheduled to expire at the end of 2017. The bill also would prevent retroactive claims of the child tax credit by stopping taxpayers from amending a return (or filing an original return) for any prior year in which the taxpayer or the qualifying child did not have an individual taxpayer identification number (ITIN) in order to claim the credit. The bill adds a provision restricting individuals from claiming the credit for 10 years if they fraudulently claimed the credit and for two years if they are found to have claimed the credit with reckless or intentional disregard of the rules.

American opportunity tax credit: The American opportunity tax credit is made permanent and modified. The bill prohibits an individual from retroactively claiming the credit by amending a return (or filing an original return) for any prior year in which the individual or a student for whom the credit is claimed did not have an ITIN. The bill adds a provision prohibiting individuals from claiming the credit for 10 years if they fraudulently claim the credit and for two years if they are found to have claimed the credit with intentional disregard of the rules. Taxpayers claiming the American opportunity credit must report the employer identification number of the educational institution to which the taxpayer makes qualified payments under the credit.

Earned income tax credit: The enhanced provisions of the earned income credit are made permanent including an increased amount for families with three or more children and an increased phaseout range for married taxpayers filing jointly. The phaseout range is indexed for inflation for years after 2015. The bill also prevents retroactive claims of the earned income credit by prohibiting individuals from claiming the credit on an amended return (or original return) for any prior year in which the individual did not have a valid Social Security number.

Sec. 62(a)(2)(D) deduction for certain expenses of elementary and secondary school teachers, which allows teachers to deduct up to $250 they spend to buy books, supplies, computer equipment, and other materials for use in their classrooms. The bill also indexes the $250 amount for inflation, beginning in 2016.

Sec. 132(f) provides parity between the exclusion for employer-provided mass transit and parking benefits by making the limit for the monthly tax exclusion for employer-provided transit passes and vanpools the same as the limit for employer-provided parking benefits.

Sec. 164(b)(5) deduction for state and local general sales taxes in lieu of a deduction for state and local income taxes.

Permanent incentives for charitable giving:

Sec. 170(b) charitable deduction for contributions of real property and the special rule for contributions of capital gain real property made for conservation purposes, which allows qualified conservation contributions to be deducted up to 50% of a taxpayer’s contribution base (100% for qualified farmers and ranchers). The bill also allows Alaska Native Corporations to deduct conservation easement donations up to 100% of their taxable income.

Sec. 408(d)(8) allows taxpayers who are at least 70½ years old to make up to $100,000 in qualified charitable distributions from individual retirement plans without including the distributions in income.

Sec. 170(e)(3)(C) permits businesses to make contributions of “apparently wholesome food” to charities that will use it for the care of the ill, the needy, or infants and to take an above-basis deduction for these contributions. The limitation is increased from 10% to 15% of the taxpayer’s adjusted gross income (15% of taxable income for C corporations) per year. New rules are will begin for valuing food inventory.

Sec. 512(b)(13)(E) changes the tax treatment of certain payments to controlling exempt organizations so that they are not treated as unrelated business income.

Sec. 1367(a)(2) allows S corporation shareholders to adjust their basis in their stock when the S corporation makes charitable contributions of property using their basis in the property instead of its fair market value.

Permanent extenders for businesses:

Sec. 41 research and development credit provides a credit for qualified research expenses. The bill also modifies the credit so that eligible businesses with $50 million or less in gross receipts can claim the credit against their alternative minimum tax (AMT) liability. Furthermore, certain small businesses can claim the credit against their payroll tax liability.

Sec. 45P employer wage credit for employees who are active duty members of the military, which provides a credit for employers for up to 20% of the eligible differential wage payments made while an employee is serving on active duty.

Sec. 168(e)(3) 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.

Sec. 179 increased $500,000 expensing limit and $2 million phaseout threshold and an expanded definition of Sec. 179 property to include qualified real property. The bill also indexes the $500,000 and $2 million amounts for inflation beginning in 2016. It treats air conditioning and heating units placed in service after 2015 as eligible for expensing. Furthermore, the bill eliminates the $250,000 cap with respect to qualified real property beginning in 2016.

Secs. 871(k)(1) and (2), exempts interest-related dividends and short-term capital gain dividends from a regulated investment company (RIC) from tax.

Sec. 1202, provides an exclusion of 100% of gain on certain small business stock.

Sec. 1374(d)(7), reduces the S corporation recognition period for built-in gains tax to five years.

The Subpart F exception under Secs. 953(e)(10) and 954(h)(9) for active financing income.

Permanent incentives for real estate investment:

The minimum low-income housing tax credit rate for nonfederally subsidized buildings, which allows a 9% minimum low-income housing credit rate for those buildings.

Sec. 142(d)(2)(B)(ii), the military basic pay allowance for housing exclusion is ignored with respect to a qualified building for purposes of the low-income housing credit.

Sec. 897(h)(4), treats RICs as qualified investment entities under the Foreign Investment in Real Property Tax Act, P.L. 96-499.

Five-year extensions:

Provisions that are extended through 2019:

Sec. 45D new markets tax credit (carryovers of the unused limitation were extended through 2021), which provides tax credits for investments in businesses or real estate in low-income communities.

Sec. 51 work opportunity tax credit equal to 40% of the qualified first-year wages of employees who are members of a targeted group. The credit is modified beginning in 2016 to allow it to be claimed by employers that hire qualified long-term unemployed individuals (unemployed for 27 or more weeks).

Sec. 168(k), provides a depreciation deduction equal to 50% of the adjusted basis of qualifying property in the first year it is placed in service (also known as bonus depreciation). The percentage phases down to 40% for property placed in service in 2018 and to 30% for property placed in service in 2019. The bill modifies the AMT rules to increase the amount of unused AMT credits that can be claimed in lieu of bonus depreciation. Bonus depreciation will now be allowed for “qualified improvement property.” The bill specifies that certain trees, vines, and fruit-bearing plants will be eligible for bonus depreciation when planted, rather than when placed in service.

Sec. 954(c)(6), provides for look through treatment of payments of dividends, interest, rents, and royalties received or accrued from related controlled foreign corporations under the foreign personal holding company rules.

Two-year extensions:

Provisions that are extended for two years (retroactively for 2015 and through 2016):

For individuals through 2016:

Sec. 108(a)(1)(E), excludes from gross income discharge of qualified principal residence indebtedness income.

Sec. 163(h)(3) treatment of mortgage insurance premiums as qualified residence interest, which permits a taxpayer whose income is below certain thresholds to deduct the cost of premiums on mortgage insurance purchased in connection with acquisition indebtedness on the taxpayer’s principal residence.

Sec. 222, provides an above-the-line deduction for qualified tuition and related expenses.

For businesses through 2016:

Sec. 45A Indian employment tax credit for employers of enrolled members of Indian tribes (or their spouses) who work on and live on or near an Indian reservation.

Sec. 45G, the railroad track maintenance credit, equal to 50% of the qualified railroad track maintenance expenditures paid or incurred by an eligible taxpayer.

Sec. 45N mine rescue team training credit, which provides a credit for a portion of training costs for qualified mine rescue team employees.

Sec. 54E qualified zone academy bonds, which allows qualified schools to issue bonds for renovations (but not new construction), equipment purchases, teacher training, or developing course materials when they partner with private businesses.

Sec. 168(e)(3)(A), allows certain racehorses to be depreciated as three-year property instead of seven-year property.

Secs. 168(i)(15) and (e)(3)(C)(ii) allowing a seven-year recovery period for motorsports entertainment complexes.

Sec. 168(j), allows owners accelerated depreciation for qualifying property used predominantly in the active conduct of a trade or business within an Indian reservation.

Sec. 179E election to expense mine safety equipment, which permits taxpayers to elect to treat 50% of the cost of any qualified advanced mine safety equipment as a deduction in the year the property is placed in service.

Sec. 181 special expensing rules for certain film and television productions, which allows taxpayers to treat costs of any qualified film or television production as a deductible expense. The provision is modified to also apply to live theatrical productions.

Sec. 199(d)(8), permits a deduction for income attributable to domestic production activities in Puerto Rico.

Sec. 1391 empowerment zone tax incentives. The bill makes a modification to allow employees to meet the enterprise zone facility bond requirement if they reside in the empowerment zone, an enterprise community, or a qualified low-income community.

Sec. 7652(f) temporary increase in the limit on cover over of rum excise taxes from $10.50 to $13.25 per proof gallon to Puerto Rico and the Virgin Islands.

The American Samoa economic development credit.

Energy tax incentives extended through 2016:

Sec. 25C, which provides a 10% credit for qualified nonbusiness energy property. The bill also updates Energy Star requirements.

Sec. 30B, provides a credit for qualified fuel cell vehicles.

Sec. 30C, provides a 30% credit for the cost of alternative (non-hydrogen) fuel vehicle refueling property.

Sec. 30D 10% credit for plug-in electric motorcycles and two-wheeled vehicles.

Sec. 40(b)(6), provides a credit for the production of each gallon of qualified second-generation biofuel.

Sec. 40A credit for biodiesel and renewable diesel, which includes the biodiesel mixture credit, the biodiesel credit, and the small agri-biodiesel producer credit.

Sec. 45(e)(10)(A)(i) production credit for Indian coal facilities.

Sec. 45 credits for facilities producing energy from certain renewable resources.

Sec. 45L, provides a credit for each qualified new energy-efficient home constructed by an eligible contractor and acquired by a person from the eligible contractor for use as a residence during the tax year.

Sec. 168(l), provides a depreciation allowance equal to 50% of the adjusted basis of qualified second-generation biofuel plant property.

Sec. 179D deduction for energy-efficient commercial buildings.

Sec. 451(i) special rule for sales or dispositions to implement Federal Energy Regulatory Commission or state electric restructuring policy for qualified electric utilities.

Secs. 6426(c) and 6427(e) excise tax credits for alternative fuels.