Tax Deal Highlights

Late last week Congress passed a massive tax and spending bill and sent it to President Obama, who promptly signed it in to law. The $680 billion tax package will extend dozens of breaks touching all sectors of the economy and make several of them permanent. Here are some of the highlights:

Permanent Business Provisions

• 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 who 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 threshold 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.
• 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.

Permanent Provisions For Individuals

• Enhanced child tax credit: In addition to a $1,000 credit per qualifying child, since 2009 parents have been entitled to an additional refundable credit equal to 15% of earned income in excess of $3,000. Beginning in 2017, this threshold would have jumped back to $10,000; however, the lower threshold was made permanent as part of the deal, putting additional cash in the pockets of millions of Americans.
• 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.
• Enhanced earned income credit: Also slated to expire in 2017 were certain enhancements made to the earned income credit, a valuable, refundable incentive for low-income families. Today’s deal will make permanent the enhanced credit for families with three or more children and increased phase-out range for married couples filing jointly.
• 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.

Provisions Extended Through December 31, 2019

Not all of the 52 provisions were made permanent, however. The following were extended only through 2019:

• The new markets tax credit,
• Bonus depreciation: the 50% immediate expensing of asset acquisitions that we’ve known in one form or another since 2001 is on its last legs. It will be permitted at 50% for 2015, 2016 and 2017 before reducing to 40% in 2018 and 30% in 2019, when it will then disappear altogether.

Provisions Extended Through December 31, 2016

The majority of the remaining 52 provisions were extended for two years, through December 31, 2016. Included among the two-year extenders are the following:

• Tuition deduction: a maximum above-the-line deduction of $4,000 will continue to be permitted for tuition costs for higher education.Film and television productions: taxpayers will continue to be permitted to deduct the first $15 million of costs for qualified film, television and live theater productions.
• Energy incentives: the following energy incentives were extended for two years:
  • A $500 credit for the purchase of certain non-business energy-efficient property,
  • Up to a $2,000 credit available to the manufacturer of energy-efficient homes,
  • Section 179D expensing of certain heating, cooling, and lighting improvements to commercial property.

Delay of Obamacare Provisions

Obamacare came under fire as part of the negotiations, as the agreement would pause the 2.3% excise tax on medical devices in 2016 and 2017, while the start of the so-called Cadillac tax on high-cost employer-sponsored health insurance would be delayed from 2018 to 2020.

This deal looks like a big win for small businesses, as it provides long-sought after permanency in the R&D credit and enhanced Section 179 deductions.