A Snapshot of the PATH Act
The year-end 2015 saw Congress provide taxpayers with a new Act signed into law by President Obama on December 18th which some commenters called an “early Christmas present” to individuals and businesses, alike. The Protecting Americans From Tax Hikes Act of 2015 (or “PATH Act”) includes numerous tax reductions for families and businesses, while also renewing and making permanent numerous tax benefits which have routinely expired and been renewed annually (so-called “extenders”). While a full analysis of the 233-page tax bill is beyond the scope of this post, we’ve gone through the provisions of the PATH Act in order to highlight some that we feel are particularly helpful to our clients.
1. The Permanent Expansion of Section 179. While certain small businesses under Section 179 of the Internal Revenue Code were previously able to deduct up to $500,000 of investments immediately, prior law scaled this amount back significantly to its current cap of $25,000. The PATH Act re-writes the limitation, permanently expanding the increased $500,000 ceiling, and indexing the amount for inflation beginning in 2016.
2. Tax-Free Charitable Distributions from IRAs Made Permanent. The PATH Act permanently extends the ability of individuals at least 70 ½ years of age to exclude from their gross income any qualified charitable distribution from an Individual Retirement Account (IRA). The exclusion may not exceed $100,000 per taxpayer in any tax year.
3. Extension of the Research Credit. The Research and Development (R & D) Credit allows businesses that engage in certain research activities to lower their tax burden. Under the PATH Act, the R & D Credit is now permanent. Additionally, the PATH Act modifies the R & D Credit for 2016, making it possible for businesses with $50 million or less in gross receipts to claim the credit against alternative minimum tax (AMT) liability.
4. Permanent Break for Landlords, Restaurants and Retailers. Section 123 of the Act permanently extends the 15-year straight line cost recovery period to depreciate leasehold improvements made to suit the needs of particular tenants, qualified restaurant property and retail renovations.
5. Lower Ceiling on S-Corporation Recognition Period for Built-in Gains. The period for which an S-corporation must hold its assets following conversion from a C-corporation to avoid built-in gains tax has been permanently reduced from 10 years to 5.
6. Bonus Depreciation Phased Out in 2019. Bonus depreciation allows all businesses to immediately deduct 50 percent of certain investment costs. This applies more broadly than the Section 179 deduction alluded to above. Bonus depreciation has been extended through 2019, and will see a phase-down in its benefits, to 40 percent in 2018 and 30 percent in 2019. The new provisions also modify bonus depreciation to include qualified improvement property and permit certain trees, vines, and fruit-bearing plants to be eligible for bonus depreciation when planted or grafted, rather than when placed in service.
7. New Provisions and Restrictions for Real Estate Investment Trusts. The PATH Act provides an array of new provisions modifying the treatment of Real Estate Investment Trusts (REITs). While the Act makes it easier for REITs to attract foreign investments, it also imposes several limitations on spinoffs involving REITS. For example, a spin-off involving a REIT will qualify as tax-free only if, immediately after the distribution, both the distributing and controlled corporation are themselves REITs. In addition, neither organization will be permitted to elect to be treated as a REIT for ten years following a tax-free spin-off.
While the scope of the new PATH Act is rather daunting, we hope that the above provision will be of some interest to you. If you would like to know more about how these changes might impact you or your business, or if you would like additional information on the provisions of the PATH Act, please contact Robert Jones at 870-336-8238, Curt Hawkins at 870-336-8243, or the Waddell, Cole & Jones, PLLC attorney with whom you normally consult.