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Jan 2016
29
January 29, 2016

Here Come the Extenders (Not Another Apocalyptic Teen Movie)—Just Another Tax Act


These days, the general view of Congress has been that they can’t get anything done. But when tax breaks are in the balance, Congress understands that their constituents at home will be very angry if they let them slip. This time, Congress actually outdid itself by not only extending the commonly called “extenders,” but making some permanent and extending others for more than another tax year by passage of the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act).

The extenders consist of a variety of over 50 individual and business tax deductions, tax credits and other tax-saving laws which have been on the books for years but burdened with built-in sunsets, most of which expired in 2014. 

To start, the research credit was made permanent by PATH, which provides certainty to businesses that want to invest in research and development. The credit amount is 20% of a taxpayer's current year's qualified spending
that exceeds a base amount related to gross receipts in certain earlier years, not to exceed 10% of the total spending in the current year on qualified research. Additionally, beginning in 2016, eligible small businesses may claim the credit against alternative minimum tax liability, and the credit can be used by even smaller businesses against the employer’s portion of FICA.

PATH extended and made permanent the reduced 5-year waiting period available for newly converted S corporations. Previously, S corporations had to wait 10 years before selling assets to avoid paying the entity level built-in gains tax. This was meant to prevent C corporations from making an  “S” election to avoid double tax payments at the corporate level on all of its assets—which resulted in double tax payments on the proceeds of sold assets in an effective federal and state tax rate of more than 50%. This change may facilitate the sale of more S corporations.

The popular 50% bonus depreciation has been extended with a gradual sunset. The bonus depreciation percentage is 50% for 2015-2017, and phases down to 40% in 2018 and 30% in 2019 before the sunset.

The provision only applies to qualified property, including tangible depreciable property with a recovery period of 20 years or less, water utility property, computer software and qualified leasehold improvement property, and excludes used equipment. Starting in 2016, qualified leasehold improvement property is expanded to “qualified improvement property” and will include any improvement to an interior portion of a commercial building if the improvement is placed in service after the date the building was first placed in service with certain limitations.

Small businesses will be able to enjoy the tax benefits of capital improvement elective expensing at $500,000 with the $2,000,000 acquisition phase-out rules, with both amounts now linked to inflation starting in 2016. Furthermore, PATH made permanent the allowance of expensing most computer software and qualified real property.

PATH was not the only Act impacting taxes. The recently enacted 2016 Consolidated Appropriations Act (CAA) also modified some important tax provisions. The “Cadillac tax,” a 40% tax on the plans valued at more than $10,200 for individual coverage and $27,500 for a family, was scheduled to start in 2018 but has been delayed until 2020. The CAA will also allow companies to deduct the Cadillac tax for income tax purposes, lowering the effective tax rate. The other Affordable Care Act implementation delay is the one-year postponement of the health insurance provider fee. Last but not least, credits are extended through 2016 for alternative fuel vehicle refueling property, two-wheeled plug-in electric vehicles and qualified fuel cell motor vehicles. These are just some of the recent tax provisions. Visit wnj.com to read our blog and articles for more details regarding this and other provisions.
 

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