Year-end tax planning through the rearview mirror
When clients are initiating an overall year-end tax strategy, surveying what was new for that year is a good first step. This is particularly true this year since the election in November makes 2017 so speculative. With that in mind, we take a look back at the new opportunities and restrictions that developed over the course of the past year — with an eye toward what clients can do before year’s end.
The Protecting Americans from Tax Hikes Act of 2015, or PATH Act, permanently extended many temporary tax incentives, removing the concern over whether these incentives will be extended retroactively for the current year or prospectively into the coming year. Not all of these provisions were extended beyond 2016, however, and some were modified in the process. Others were extended for up to five years. Here is a rundown for advisers of a few notable extenders.
- Teachers’ classroom expense deduction. The PATH Act permanently extended the above-the-line deduction for elementary and secondary–school teachers’ classroom expenses. It also modifies the deduction by indexing the $250 ceiling amount to inflation beginning in 2016; because of rounding, no increase has been made for 2016. Additionally, starting in 2016, the act includes within the scope of the deduction “professional development expenses,” which include the cost of courses related to the curriculum in which the educator provides instruction.
- Two-year extensions for individuals. The PATH Act renewed several extenders related to individuals for two years through 2016, so they are up for renewal again at the end of 2016. This group includes the above-the-line deduction for qualified tuition and fees for post-secondary education and the treatment of mortgage insurance premiums as deductible interest that is qualified residence interest subject to an adjusted gross income phaseout. The act’s two-year extender provisions also included the mortgage debt exclusion that has enabled those taxpayers underwater or otherwise in trouble with their mortgages to negotiate workouts with their lenders without the burden for having the debt forgiveness taxed as income. One change, however, can reach into 2017, even without the expectation of eventual renewal by Congress: The exclusion applies to qualified principal residence indebtedness discharged in 2017 if discharge is made under a binding written agreement entered into in 2016.
- Permanent extensions for businesses. The act makes permanent many business-related provisions that had been up for renewal, including the 100% gain exclusion on qualified small-business stock; the reduced, five-year recognition period for S corporation built-in gains tax; 15-year straight-line cost recovery for qualified leasehold improvements, restaurant property and retail improvements; charitable deductions for the contribution of food inventory; and others. Perhaps most significant, especially for small businesses, enhancements starting in 2016 were added to both a permanently extended research credit and the Code Sec. 179 expensing deduction.
Eligible taxpayers can now qualify for a waiver of the 60-day time limit and avoid possible taxes and penalties on early distributions, if they meet certain requirements.August 25
Either a Clinton or Trump presidency could potentially bring changes in estate tax laws, so start preparing now.August 29
- Research credit. The PATH Act made permanent the credit for increasing research activities (the research credit). Particularly relevant to small businesses starting in 2016, the act added the research credit to the list of general business credit components designated as “specified credits” that may offset the Alternative Minimum Tax as well as regular tax, effective for credits determined for tax years beginning after Dec. 31, 2015. An eligible small business may instead elect to apply a portion of its research credit against the 6.2% payroll tax imposed on the employer’s wage payments to employees.
- Code Sec. 179 expensing. The PATH Act permanently set the Code Sec. 179 expensing limit at $500,000 with a $2 million overall investment limit before phaseout (both amounts indexed for inflation, in 2016 at $500,000 and $2.01 million, respectively). New for 2016, the PATH Act also removed the $250,000 cap related to the expensing of qualified real property. Consequently, for a tax year beginning in 2016, up to $500,000 of the cost of qualified real property may be applied toward the overall $500,000 limitation that applies to a tax year beginning in 2016. Also made permanent was the special rule allowing off-the-shelf computer software to be treated as Code Sec. 179 property and the ability of a taxpayer to revoke a Code Sec. 179 election without IRS consent.
- Five-year extensions for businesses. The PATH Act extended several business-related provisions so they are available for five years, under the expectation that general tax reform will consider a more permanent fate. Among these provisions, bonus depreciation and the Work Opportunity Credit have widespread applicability.
- Bonus depreciation. Bonus depreciation (additional first-year depreciation) has been extended but under a phase-down schedule through 2019: at 50% for 2015-2017; at 40% in 2018; and at 30% in 2019. The PATH Act also continues the election to accelerate the use of AMT credits in lieu of bonus depreciation (made on a timely filed tax return) and increases the amount of unused AMT credits that may be claimed in lieu of bonus depreciation. Rev. Proc. 2016-48 provides the procedures for claiming or not claiming bonus depreciation for qualified property for taxpayers with a tax year beginning in 2014 and ending in 2015. Additionally, the PATH Act modifies bonus depreciation to include qualified improvement property, as well as certain trees, vines and plants bearing fruits or nuts.
- Qualified improvement property. Effective for property placed in service on or after Jan. 1, 2016, qualified improvement property qualifies for bonus depreciation. The “qualified improvement property” category replaces the “qualified leasehold improvement property” category of property qualifying for bonus depreciation. “Qualified improvement property” is defined as any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was “first placed in service.”