Every year for the past several years, Congress has passed a tax extenders bill that extended for another year or two various “temporary” tax breaks that had expired at the end of the previous year. It has done so again this year with passage of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). However, this time there is a big difference—many of the most popular tax breaks have been made permanent, while the others have been extended for either five or two years, retroactive to the start of 2015. This will add some welcome certainty to the tax planning process for both individuals and businesses.
The PATH Act contains over 100 tax provisions. Here is a summary of those most important to individuals and small business owners.
There were many expired provisions affecting individual taxpayers that have been extended or made permanent. All these extensions were made retroactive to the beginning of 2015; thus, you may take advantage of these deductions when you complete your 2015 individual tax return.
This provision allows teachers of grades K-12 to deduct up to $250 of the cost of classroom supplies that they purchase themselves. This is an “above the line” deduction, meaning it's available whether or not teachers itemize their personal deductions. This provision has been extended permanently. Also, for the first time “professional development expenses,” such as professional development courses, are included in the deduction.
Commuters who take mass transit to work are now permanently entitled to the same tax-free employer-provided stipend to defray their expenses as are those who drive to work. This amount is $250 per-month for 2015 and $255 for 2016. (This amount has been only $130 for commuters.)
This personal itemized deduction allows taxpayers to deduct their state and local sales taxes instead of state and local income taxes. It has been made permanent—a big win for taxpayers who live in states with no income taxes.
This provision allows up to $4,000 in tuition, fees, and other expenses for college, graduate school, vocational school, or other post-secondary education to be deducted, whether or not you itemize. You may take this deduction for eligible expenses you pay for yourself, your spouse, or your dependents. This deduction has been extended for two years, through 2016.
This provision allows itemizers who pay for private mortgage insurance to obtain a home loan to deduct their premiums. This deduction has been extended for two years, through 2016.
Homeowners who sell their homes for a loss or lose them through foreclosure may exclude from income cancellation of mortgage debt on a principal residence of up to $2 million ($1 million for married taxpayers filing separately) through 2016. Also, the exclusion will apply to debt discharged in 2017 if it is made under a binding written agreement entered into in 2016.
This popular tax break allows anyone over 70-1/2 to make tax-free withdrawals of up to $100,000 from a traditional IRA provided that the money is distributed directly to an eligible charity. This provision has been made permanent.
You may now claim a credit of 10% of the cost of certain energy saving property that you added to your main home through 2016. This includes the cost of installing qualified insulation, windows, exterior doors, and roofs. You can claim no more than $200 in total credits for windows, $50 for a main air circulating fan, $150 for a hot water boiler, or $300 for any other energy-efficient property. There is a $500 lifetime limit on this credit.
The child tax credit provides a $1,000 credit for families with dependent children under age 17. Low income families who qualify for the credit, but who owe little or no income tax, can obtain a tax refund. Under the PATH Act, families that earn as little as $3,000 can obtain this refundable credit. Without Congressional action, the credit would only apply to families making over $14,000, beginning in 2018, meaning that many families would stop receiving the credit.
This credit, which covers expenses for the first four years of college or other post-secondary education, has been increased to $2,500 and made permanent. Forty percent (40%) of the credit (up to $1,000) is refundable. This means you can get it even if you owe no tax. This credit had been scheduled to expire after 2017.
The following are some of the most significant tax breaks for businesses that have been made permanent or extended for two or five years.
Tax Code Section 179 allows businesses to deduct in one year the cost of new or used tangible personal business property up to an annual limit. Congress has now permanently set the Section 179 annual limit at $500,000, made retroactive to 1/1/2015. In addition, a business owner may purchase up to $2 million in business property that qualifies for the Section 179 deduction each year. The deduction is phased out for those who purchase more than this amount. These limits will be indexed for inflation starting in 2016.
Bonus depreciation enables a business owner to deduct in a single year a substantial amount of a new long-term asset’s cost. In recent years, the bonus depreciation amount has been 50%. This bonus depreciation expired at the end of 2014. Congress has retroactively extended it through 2019. However, the bonus depreciation percentage will be gradually phased down as follows:
Bonus depreciation will end on January 1, 2020 unless extended again by Congress.
For automobiles and trucks first placed into service in 2015, if 50% bonus depreciation is claimed, the annual limit on first year depreciation is increased by $8,000--from $3,160 and $3,460, respectively, to $11,160 or $11,460.
This provision allows founders of and investors in certain regular C corporations to sell or exchange their stock tax-free after five years. It has been made permanent.
This complex provision, which has been around since 1981 and extended 16 times, is used primarily by larger businesses. It allows businesses that engage in certain research activities to obtain an often substantial tax credit. It has been made permanent and increased.
Energy Efficiency Deductions for Commercial Buildings
This deduction allows businesses to write off up to $1.80 per square foot for energy efficient improvements made to commercial buildings and government buildings. It has been extended through 2016.
A provision allowing eligible contractors to claim a $1,000 or $2,000 tax credit for the construction or manufacture of new energy efficient homes is extended through 2016.
This provision, which has been made permanent, allows up to $250,000 ($500,000 in 2016 and later) in improvements made to qualified leasehold improvement property, restaurant property, and retail improvement property to be deducted under Section 179, with the remaining cost deducted over 15 years.
Employers that hire members of target groups may qualify for a tax credit. Targeted groups include veterans, welfare and food stamp recipients, low-income ex-felons, disabled people, and high-risk young people. This provision has been extended through 2019. An employer wage credit for hiring employees who are active duty members of the uniformed services has been made permanent.