What the PATH Act Means for You

The Protecting Americans from Tax Hikes Act (“The Act”) was signed into law by the President on December 18, 2015. The Act includes a number of significant tax changes. Some of the more important changes effective after December 31, 2014, (unless indicated) are as follows:

• R&D Credit – The Act retroactively and permanently extends the research credit and may be used as an offset against Alternative Minimum Tax (AMT) in certain situations. No changes were made to the calculation method of the R&D credit.

• R&D Credit – Offset against AMT. The Act provides that the R&D credit can be claimed against an AMT offset for an eligible small business (ESB), which is defined as a business with $50 million or less of gross receipts effective January 1, 2016.

• R&D Credit – Offset against payroll taxes. Effective after December 31, 2015, the Act provides that a qualified small business (QSB), which is defined as having gross receipts of less than $5 million in current year and not having gross receipts for more than $5 million in the prior year, is eligible to offset their R&D credit against their payroll taxes. The maximum payroll tax offset is $250,000.

• Section 179 – The $500,000 expensing limitation and $2 million phase-out amounts are retroactively extended and made permanent; after 2015, the limits are indexed for inflation.

• Section 179 – The rule that allows expensing for off-the-shelf computer software is retroactively extended and made permanent.

• Bonus Depreciation – The Act extends bonus depreciation for qualified property acquired and placed in service during 2015 through 2019 (50% for 2015-2017, 40% for 2018, and 30% for 2019).

• Qualified Leasehold Improvements – The Act retroactively extends and makes permanent the inclusion of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property in the 15-year Modified Accelerated Cost Recovery System (MACRS) class.

• Built-In-Gains Tax – The Act retroactively and permanently provides that for determining the net recognized built-in gain, the recognition period is a 5-year period.

• Work Opportunity Credit – The Act retroactively extends the work opportunity credit so that it applies to eligible veterans and non-veterans who begin work for an employer before January 1, 2019. With respect to individuals who begin work for an employer after December 21, 2015, the credit applies to employers who hire certain qualified unemployed individuals. The credit with respect to such long-term unemployed individuals is 40% of the first $6,000 of wages.

• Empowerment Zone Tax Incentives – The Act extends for two years, through December 31, 2016, the period for which the designation of an empowerment zone is in effect.

• New Market Credit – The Act retroactively extends the new markets tax credits through 2019. It provides up to $3.5M in qualified equity investments for each calendar year from 2015 through 2019. The carryover period for unused new markets credits is extended through 2024.

• Exclusion of Gain from Certain Small Business Stock – The Act retroactively and permanently extends the 100% exclusion and the exception from minimum tax preference treatment.

• Tax-free IRA Transfers to Charities – The Act retroactively and permanently extends the ability of individuals at least 70½ years of age to exclude from gross income qualified charitable distributions from IRAs of up to $100,000 per year.

• Mortgage Insurance Premiums – The Act retroactively extends this provision for two years so that a taxpayer can deduct, as qualified residence interest, mortgage insurance premiums paid or accrued before January 1, 2017.

• Qualified Tuition Deduction – The Act retroactively extends through 2016 the above-the-line deduction for qualified tuition and related expenses for higher education.

• American Opportunity Tax Credit (AOTC) – The Act makes the AOTC permanent.

• Child Tax Credit (CTC) – The Act makes the enhanced CTC permanent by setting the threshold dollar amount for purposes of computing the refundable credit at an unindexed $3,000.

• Look-through Rules for Payments between Related to Controlled Foreign Corporations (CFC) under the Foreign Personal Holding Company Income — The Act retroactively extends the look-through treatment for related CFC’s for five years making it applicable to qualifying CFC’s for tax years beginning on or before January 1, 2020, and to the tax year of US shareholders with or within the tax years of the qualifying CFC end. This rule provision generally permits the tax treatment of the receipt of dividends, interest, rents, and royalties income items as non- foreign personal holding income (FPHCI) sources and does not require immediate income inclusion for US tax reporting purposes provided that such income items under the look through provisions are determined to be attributable or properly allocable to non-subpart F income, or such income items are determined to be not effectively connected with the conduct of a US trade or business of the payer.

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