Dear Clients and Friends:
Late last year Congress finally passed tax legislation named the Consolidated Appropriations Act, 2016, which contains good news for just about everyone. It makes many of the long-favored tax breaks (so-called extenders) permanent and retroactively extends (some for five years, others for two years) the rest of them, and, for the cherry on top, it throws in a few new tax breaks as well. Taxpayers will finally be able to determine with relative certainty the impact of these tax provisions on their long-term financial and business planning decisions. Here is a quick summary of the most important tax changes.
Family and Individual Tax Breaks
Tax Breaks Made Permanent. The Act makes a whole slew of favored individual provisions permanent including the following:
- Deduction of State and Local General Sales Taxes
- IRA Qualified Charitable Contributions
- $250 Deductions for K-12 Educators
- Qualified Conservation Contribution Breaks
- 100% Gain Exclusion for Qualified Small Business Corporation (QSBC) Stock
- American Opportunity Tax Credit (AOTC)
- Parity for Employer-Provided Transit and Parking Benefits
- Favorable Rule for S Corporation Donations of Appreciated Assets
- Credits for Qualified Solar Electric and Water Heating Property (extended through 2021)
Tax Breaks Extended through 2016. Individual tax breaks that weren't made permanent or extended through 2021 by the Act, were extended for two years through 2016, including the following:
- Tax-free Treatment for Forgiven Principal Residence Mortage Debt.
- Mortgage Insurance Premium Deduction
- Qualified Tuition Deduction
- $500 Energy-efficient Home Improvement Credit
New Tax Breaks. The Act also includes a number of new individual tax breaks, including:
- Allowing tax-preferred distributions from section 529 accounts to be spent on qualifying computer equipment and technology purchases
- Allowing ABLE accounts, which currently may be located in the state of residence of the beneficiary, to be established in any state. Individuals setting up ABLE accounts to choose the state program that best fits their needs.
- Allowing taxpayer to roll over distributions from an employer-sponsored retirement plant and traditional IRA into a SIMPLE IRA, provided the SIMPLE IRA has existed for the last two years.
Cost Recovery Provisions
Enhanced Section 179 Deduction Made Permanent. The Act retroactively restores and makes the following permanent:
- Enhanced maximum section 179 deduction of $500,000
- Enhanced Section 170 deduction phase-out threshold of $2-million
- Rule allowing section 179 deductions for qualified real property
Additionally, for tax years beginning after 2015:
- $500,000 and $2 million limits will be indexed for inflation
- Special $250,000 deduction cap that previously applied to qualified real property will be eliminated
- A/C and heating units will be eligible for expensing
15-year Depreciation for Certain Real Property Improvements Made Permanent. The Act retroactively makes permanent the 15-year straight-line depreciation privilege for qualified leasehold improvements, restaurant property and space improvements.
Bonus Depreciation Extended Through 2019. The Act retroactively extends bonus depreciation for qualifying new assets that are placed in service during 2015 through 2019. The bonus depreciation percentage is 50% for property placed in service during 2015 through 2016, and phases down to 40% for property placed in service in 2018 and 30% for property placed in service in 2019.
For new passenger autos and light trucks subject to the luxury auto depreciation limitations, the bonus depreciation increases the maximum first-year depreciation deduction by $8,000 for vehicles placed in service through 2017, $6,400 for vehicles placed in service in 2018, and $4,800 for vehicles places in service in 2019.
Read more here.
Other Business Tax Breaks
Tax Breaks Made Permanent. Business provisions made permanent by the Act include the following:
- Research and Development (R&D) Credit.
- Break for S Corporation Built-in Gains
- Differential Pay Credit for Small Employers
Work Opportunity Credit (WOTC) Hiring Deadline Extended through 2019.
Tax Breaks Extended through 2016. The following business tax breaks were retroactively extended for two years through 2016:
- Credit for Building Energy-Efficient Homes
- Energy-Efficient Commercial Building Property Deduction
New Rules for Information Reporting
Accelerated Due Date for Reporting Employee and Nonemployee Compensation. Currently Form 1099-MISC and W-2 must be filed with the IRS by the last day of Februrary of the year following the calendar year to which such returns relate. Starting in 2017 the 1099-MISC form and W-2 must be filed by the end January.
Penalty Relief for De Minimis Errors on Information Returns. The Act establishes a new safe harbor from penalties if the return is otherwise correctly filed but includes a de minimis error of $100 or less ($25 or less in the case of errors involving tax withholding). In this case, the issuer is not required to file a corrected return and no penalty is imposed, unless the recipient of the return requests a corrected return.
Read more here.
Healthcare Excise Taxes Delayed
The Act delays the imposition following healthcare excise taxes:
- Medical Device Tax
- Cadillac Medical Insurance Tax
As you can see, the tax extender legislation includes many tax law changes, however the good news is that most of the changes were favorable for most taxpayers. Please let us know if you have any questions or want more complete information relative to your particular circumstances. Also, just a reminder that Form 1099's and W-2's should be issued to the recipient by January 31st, so let us know if you need our assistance in preparing them.
Wittenberg CPA, PS