January 25, 2016
Recent Tax Legislation and Tax Savings Opportunities
As a follow up to our year-end planning email, we would like to provide you with some tax updates regarding recently passed Federal tax legislation. On December 18th, President Obama signed the “Protecting Americans from Tax Hikes” (PATH) Act of 2015. The PATH Act makes more than 20 tax breaks permanent in addition to retroactively extending others for two or more years. Here are some of the bill’s highlights that we believe to be most beneficial:
Individual Tax Provisions
Qualified Small Business Stock (QSBS): The 100% gain exclusion for investors in small companies has been permanently extended. QSBS acquired after September 28, 2010 may be eligible for a 100% gain exclusion. In order to qualify for the exclusion, the QSBS stock must have been held for a minimum of five years. The amount of eligible gain is the greater of $10 million or 10 times your basis in the stock. QSBS is generally defined as original issue stock where the gross assets of the company did not exceed $50 million when the stock was issued. We would be happy to assist you in reviewing your stock holdings to determine if any is eligible for qualified small business stock treatment or assist in tracking your holdings. For further information regarding Qualified Small Business Stock,
Charitable Distributions from IRAs: The PATH Act permanently extends the provisions allowing tax-free distributions by individuals age 70½ or older directly from their IRAs to qualified charities. The annual limit is $100,000 per taxpayer. Any distributions made to charity may qualify as part or all of the taxpayer’s required minimum distribution for the year. This option can provide tax savings opportunities for those taxpayers who are subject to charitable limitations or deduction phase-outs.
State and Local Sales Taxes: Taxpayers may elect to deduct state and local sales taxes in lieu of deducting state and local income taxes. This optional deduction may benefit purchasers of certain big-ticket items and is now permanent.
Provisions for Businesses
Section 179 Expensing: The PATH ACT permanently restores the ability to deduct certain fixed assets up to a maximum of $500,000. If asset purchases exceed $2 million, the amount eligible for deduction may be reduced. Both amounts will be indexed for inflation for 2016 and thereafter.
Bonus Depreciation: Taxpayers can also continue to deduct 50% of the cost of new assets placed in service during 2015, 2016 and 2017. However, going forward, the bonus depreciation benefit will be reduced in future years to 40% for 2018 and 30% for 2019. Currently, the ability to claim bonus depreciation will completely expire after 2019.
15-Year Cost Recovery: This tax law also permanently extends the ability to use a cost recovery period of 15 years (rather than 39 years) for qualified leasehold, restaurant and retail property.
Research and Development Credit: The credit for research and development expenses has been made permanent. Companies that incur research and development costs, particularly small businesses and start-ups, may realize significant tax benefits from claiming the credit.
We look forward to discussing this new legislation with you to determine which provisions might benefit you.