TAX PROVISIONS INCLUDED IN THE PATH ACT OF 2015

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1 CPAs & ADVISORS TAX PROVISIONS INCLUDED IN THE PATH ACT OF 2015 January 12, 2016 TO RECEIVE CPE CREDIT Participate in entire webinar Answer polls when they are provided If you are viewing this webinar in a group Complete group attendance form All group attendance sheets must be submitted to training@bkd.com within 24 hours of webinar Answer polls when they are provided If all eligibility requirements are met, each participant will be ed their CPE certificate within 15 business days of live webinar 1

2 Jesse Palmer, CPA Director of Tax Quality Control Robert Conner, CPA National Tax Assistant Director Damien Martin, CPA National Tax Assistant Director TODAY S AGENDA Individual Provisions Business Provisions Depreciation Changes Other Provisions Q&A 2

3 PATH ACT Protecting Americans from Tax Hikes Act of 2015 $622 billion price tag Enacted December 18, 2015, with bipartisan support Combined with $1.1 trillion omnibus spending package Most were expecting temporary extension of various expired tax provisions Received MUCH more! Mostly taxpayer favorable CPAs & ADVISORS SELECT INDIVIDUAL PROVISIONS 3

4 INDIVIDUAL PROVISIONS State & Local Sales Tax Deduction What is it? Election to claim an itemized deduction for state & local general sales taxes in lieu of deducting state & local income taxes Without PATH: Expired for tax years beginning after December 31, 2014 With PATH: Retroactively extended & made permanent INDIVIDUAL PROVISIONS State & Local Sales Tax Deduction Example: The facts Jack & Jill are retired & live in Chicago, IL Received $250,000 in retirement distributions, paid $10,000 in real estate taxes & made $10,000 in charitable contributions in 2015 Purchased a yacht in 2015 & paid $100,000 in state & local sales tax 4

5 INDIVIDUAL PROVISIONS State & Local Sales Tax Deduction Example: The federal impact of PATH Without PATH With PATH Adjusted gross income $500,000 $500,000 Itemized deductions 12, ,531 Exemptions Taxable income 487, ,469 Tax liability 149, ,492 Tax savings with the extension under PATH of $15,829 INDIVIDUAL PROVISIONS Qualified Conservation Contributions What is it? Enhanced charitable deduction & carryforward period for aggregate contributions of appreciated qualified real property to a qualified organization for conservation purposes Without PATH: Expired for tax years beginning after December 31, 2014 With PATH: Retroactively extended & made permanent; modified to permit Alaska Native Corporations to deduct qualified contribution contributions up to 100% of taxable income 5

6 INDIVIDUAL PROVISIONS Charitable Distributions from IRAs What is it? A taxpayer who is age 70 ½ & older can make tax-free distributions from an Individual Retirement Account (IRA) to a qualified charitable organization up to $100,000 per tax year Without PATH: Expired for tax years beginning after December 31, 2014 With PATH: Retroactively extended & made permanent INDIVIDUAL PROVISIONS Charitable Distributions from IRAs Example: The facts Jack & Jill are retired & live in Chicago, IL. They both have required minimum distributions of $100,000 in 2015, & paid $10,000 in real estate taxes They would like to make charitable contributions of $200,000 6

7 INDIVIDUAL PROVISIONS Charitable Distributions from IRAs Example: The federal impact of PATH Without PATH With PATH Adjusted gross income $200,000 $ - - Itemized deductions 110,000 12,600 Exemptions 8,000 8,000 Taxable income 82, Tax liability 12, Tax savings with the extension under PATH of $12,094 INDIVIDUAL PROVISIONS Exclusion of 100% of Gain on Certain Small Business Stock What is it? A noncorporate taxpayer may exclude all gain realized on disposition of qualified small business stock held for more than five years subject to a per taxpayer limit. Excluded portion of gain is also excepted from treatment as an alternative minimum tax (AMT) preference item Without PATH: Exclusion was to be limited to 50% of gain for stock acquired after December 31, 2014; 7% of excluded gain was to be an AMT preference With PATH: Retroactively extended & 100% exclusion & exception from AMT preference treatment made permanent 7

8 INDIVIDUAL PROVISIONS Nonbusiness Energy Property Credit What is it? A taxpayer can claim a credit of 10% of qualifying expenses for installing insulation, energy efficient exterior windows & doors & energy efficient heating & air conditioning services up to a $500 lifetime limit (with no more than $200 from windows & skylights) Without PATH: Expired for tax years beginning after December 31, 2014 With PATH: Retroactively extended through 2016; modified to require exterior windows & doors meet Version 6.0 of Energy Star Program to qualify for credit for property placed in service after December 31, 2015 INDIVIDUAL PROVISIONS Changes to Section 529 Plan Distribution Rules Definition of qualified higher education expenses which qualify as eligible, tax-preferred distributions from 529 accounts was expanded by PATH to include computer technology & equipment for tax years beginning after December 31, 2014 PATH modifies requirement to aggregate distributions from 529 accounts for distributions made after December 31, 2014 Tuition payments made with distributions from a 529 account & later refunded are treated as a qualified expense if refunded amount is recontributed to a 529 account within 60 days of receipt. This provision is effective for refunds received after

9 INDIVIDUAL PROVISIONS Rollover Allowed From Retirement Plans to SIMPLE Accounts PATH allows a taxpayer to roll over amounts from an employersponsored retirement plan to a SIMPLE IRA if plan existed for at least two years for contributions after December 18, 2015 CPAs & ADVISORS SELECT BUSINESS PROVISIONS 9

10 BUSINESS PROVISIONS R&E CREDIT Research & Experimentation (R&E) Credit permanently extended, retroactive to 2015 Credit based on % of qualifying research expenses Wages Supplies Contract research Regular credit vs. alternative simplified credit Compare methods for best result Many states also provide R&E credits BUSINESS PROVISIONS R&E CREDIT What qualifies? Products & processes Process of experimentation required PATH Act modifications Eligible small businesses claim credit against alternative minimum tax for tax years beginning after December 31, 2015 Certain small start-up businesses can claim credit (up to $250K) against payroll tax liabilities for tax years beginning after December 31,

11 BUSINESS PROVISIONS WOTC CREDIT Work opportunity tax credit (WOTC) extended through 2019 Tax credit for employers hiring individuals from certain targeted groups, including Qualified veterans Qualified ex-felons Residents of designated communities Qualified SSI recipients Credit based on % of qualified wages paid Generally maximum credit of $2,400 per qualified employee Certification rules apply BUSINESS PROVISIONS WOTC CREDIT PATH Act adds new category of qualifying employee Qualified long-term unemployment recipient Unemployed 27 weeks or more Receiving unemployment compensation Credit for this category effective for individuals who begin work after December 31,

12 BUSINESS PROVISIONS ALTERNATIVE FUEL CREDIT 50 per gallon tax credit for certain alternative fuels sold or used by taxpayer extended through 2016 Refundable credit Claimed against fuel excise tax liability In some cases, a credit against income tax Alternative fuels include Liquefied petroleum gas (propane) P Series fuels Compressed or liquefied natural gas Liquefied hydrogen Does not include ethanol, methanol or biodiesel BUSINESS PROVISIONS ALTERNATIVE FUEL CREDIT Requires certification with IRS before claiming credit Often beneficial for businesses using propane forklifts PATH Act includes revenue provision modifying credit amount for fuel sold or used after December 31, 2015 Liquefied natural gas - 50 per energy equivalent of diesel fuel vs. per gallon (approximately 29 per gallon) Liquefied petroleum gas - 50 per energy equivalent of gasoline vs. per gallon (approximately 36 per gallon) 12

13 BUSINESS PROVISIONS S CORPS Recognition period for built-in gains (BIG) tax permanently reduced to five years vs. 10 years Applies to S corps previously taxed as C corps Asset value over tax basis at date of S conversion (i.e., built-in gain) BIG tax intended to prevent C corps escaping corporate level tax by converting to S corp prior to sale of assets BIG tax equal to highest marginal corporate rate (35%) times recognized built-in gain BUSINESS PROVISIONS BIG TAX EXAMPLE Asset Tax Basis FMV BIG Cash 10,000 10,000 - A/R 25,000 22,000 (3,000) Inventory 50,000 55,000 5,000 Fixed Assets 12,000 25,000 13,000 Goodwill - 100, ,000 Total 97, , ,000 Table reflects basis & FMV at date of S conversion (January 1, 2016) S corp sells all assets immediately after conversion Potential BIG tax is $40,250 (35% times $115,000) No BIG tax exposure if assets not sold for five years after conversion 13

14 BUSINESS PROVISIONS 1099 & W-2 CHANGES Accelerated due dates for W-2, W-3 & returns to report nonemployee compensation (e.g., 1099-MISC) Must file with IRS by January 31 (same due date as employee & payee statements) No longer eligible for extended filing date for e-filed returns Effective for returns & statements filed in 2017 for 2016 tax year Extended ability to truncate social security numbers to W-2 forms SSN truncation previously only allowed on Forms 1099 Provisions intended to combat identity theft & fraudulent refund issues BUSINESS PROVISIONS CAPTIVE INSURANCE COMPANIES Certain small insurance companies can elect to exclude receipt of premiums from taxable income Pre-PATH Act - $1.2 million PATH Act increased to $2.2 million & indexed for inflation PATH Act also added new diversification requirements to be eligible for premium exclusion election Risk diversification test Relatedness test Company must meet one of these tests Annual reporting to IRS 14

15 CPAs & ADVISORS SELECT DEPRECIATION PROVISIONS DEPRECIATION & EXPENSING PROVISIONS Enhanced Section 179 Expensing (Retroactively extended for 2015 & made permanent) $500,000 annual expensing limit ($25,000 under Pre-Act Law) Phaseout threshold begins at $2 million ($200,000 under Pre-Act Law) Eligible property computer software & qualified real property Air conditioning & heating units are eligible after 2015 Eliminates $250,000 expensing cap for qualified real property after 2015 Indexes amounts for inflation 15

16 DEPRECIATION & EXPENSING PROVISIONS Qualified Leasehold, Restaurant & Retail Improvements (Retroactively extended for 2015 & made permanent) 15-year recovery period (39 year under Pre-Act Law) DEPRECIATION & EXPENSING PROVISIONS Bonus First-Year Depreciation (Retroactively extended through 2019) % of basis of qualifying property 40% of basis of qualifying property 30% of basis of qualifying property Qualified Improvement Property eligible for bonus depreciation after 2015 Improvements to interior portion of real property if placed in service after building is placed in service Does not include building enlargements, elevator or escalators or internal structural framework 16

17 DEPRECIATION & EXPENSING PROVISIONS Bonus First-Year Depreciation Continued (Retroactively extended through 2019) After 2015, certain trees, vines & fruit-bearing plants are eligible for bonus depreciation when planted or grafted Corporations can elect to accelerate use of AMT credits in lieu of claiming bonus depreciation After 2015, Act increases amount of unused AMT credits that may be claimed in lieu of bonus depreciation DEPRECIATION & EXPENSING PROVISIONS Enhanced First-Year Depreciation Cap for Autos & Trucks (Retroactively extended through 2019) First year depreciation cap for qualifying autos & light trucks placed in service during following years is increased Additional $8, Additional $6, Additional $4,800 17

18 DEPRECIATION & EXPENSING PROVISIONS Section 179D Energy Efficient Commercial Business Property (EECBP) Deduction (Retroactively extended through 2016) Immediate deductions provided for energy efficient improvements to lighting, heating, cooling, ventilation & hot water systems of commercial buildings Amount of deduction up to $1.80 per square foot for installation of EECBP in lieu of depreciating property, generally over a 39-year period DEPRECIATION & EXPENSING PROVISIONS Other Depreciation & Expensing Provisions (Retroactively extended through 2016) Seven-year write-off for motorsport racing track facilities Classification of certain race horses as three-year property Accelerated depreciation for business property on an Indian reservation 18

19 CPAs & ADVISORS OTHER PATH ACT PROVISIONS AFFORDABLE CARE ACT PROVISIONS Moratorium on 2.3% medical device excise tax Won t apply to sales in 2016 & 2017 Delay of Cadillac excise tax on high-cost employer-sponsored health coverage Now effective for tax years beginning after December 31, 2019 Payments will be deductible One-year suspension (in 2017) of annual fee on health insurance providers 19

20 OTHER PROVISIONS Numerous other individual & business extenders Real estate investment trust (REIT) provisions Changes to tax court rules IRS reforms IRS funded at $11.2 billion for 2016 ($290M increase) Handful of revenue provisions ADDITIONAL RESOURCES BKD Alert at Joint Committee on Taxation report JCX (dated December 17, 2015) 20

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22 CPE CREDIT This presentation may be eligible for CPE credit upon verification of participant attendance For questions or comments regarding CPE credit, please BKD Learning & Development Department at THANK YOU FOR MORE INFORMATION // For a complete list of our offices and subsidiaries, visit bkd.com or contact: Jesse Palmer, CPA // Director of Tax Quality Control jpalmer@bkd.com // Robert W. Conner, CPA // National Tax Assistant Director rwconner@bkd.com // Damien Martin, CPA // National Tax Assistant Director drmartin@bkd.com //