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Individual tax strategies
New Congressional Spending Bill Affects Individuals and Businesses
Most taxpayers are familiar with the end-of-year “extender legislation” activity in Congress: approximately 50 deductions, credits and other taxpayer-friendly provisions that are rolled forward for a year or two at a time. This short-term approach is a budget maneuver, to avoid adding to the published size of the federal deficit.
On December 18, Congress finally passed and the President signed the retroactive extender legislation, restoring provisions that expired as of the beginning of 2015. But this year’s legislation was a breath of fresh air: Many of these “extenders” have been made permanent, and some were also enhanced. The others were all rolled ahead two years, to remain in the law through 2016.
This communication summarizes key provisions in this legislation, and also provides information on other timely tax developments of interest to businesses and individuals.
Key business provisions
Section 179 deduction
The legislation permanently extends this first-year depreciation deduction at the $500,000 level for tax years beginning in 2015 and after. The deduction generally applies to new or used equipment and specialized production facilities, but not to real estate (although there is currently a limited opportunity to apply up to $250,000 of the Section 179 allowance to qualified real property, including certain leasehold improvements, restaurant property, and retail improvements). The deduction phases out if a taxpayer has more than $2 million of eligible asset additions in the year. For tax years beginning in 2016 and after, the $500,000 deduction amount and $2 million asset addition limit are indexed for inflation. Further, the $250,000 cap on qualified real property is eliminated.
50 percent bonus depreciation
This first-year depreciation deduction, available to all businesses regardless of size, is also extended and ultimately phased out. It applies to new (not used) property placed in service during the calendar year, and remains at 50 percent through 2017. The deduction drops to 40 percent for calendar year 2018 and to 30 percent in 2019, before expiring in 2020. This phase-down is no surprise, as this provision, unlike other “extenders,” had its origins as a temporary economic stimulus during recessionary periods. Beginning in 2016, nonresidential interior building improvements qualify for bonus depreciation, not merely a narrow category of leasehold improvements.
Enhanced research credit
The research and development (R&D) tax credit is finally made permanent (it’s been in the law since the 1980s). And for tax years beginning after 2015, two improvements apply. A business with $50 million or less in gross receipts may claim the credit against Alternative Minimum Tax (AMT) as well as regular income tax. Smaller businesses under $5 million in gross receipts may electively apply this credit against payroll taxes — a significant benefit if that small business is not yet profitable and paying income taxes.
Extended jobs credit
The Work Opportunity Tax Credit is extended through 2019. This credit rewards employers who hire various categories of disadvantaged workers. An additional category of eligible new hires is added beginning in 2016: Those who have been unemployed at least 27 consecutive weeks. Like many of the other new hire categories, the tax credit for this new category is 40 percent of the first $6,000 of wages.
Other business provisions made permanent
A number of other business extenders were made permanent. Here are several of the more important provisions:
- The shorter five-year built-in gain period that applies to C corporations that elected S corporation status
- Fifteen-year recovery period for qualified leasehold improvements, restaurant property, and qualified retail improvements (versus the normal 39-year life for depreciable real estate)
- The 100 percent gain exclusion on the sale of certain small business C corporation stock acquired and held more than five years
Two-year moratorium on medical device tax
The Affordable Care Act’s 2.3 percent excise tax on the sale of medical devices is suspended for sales during calendar years 2016 and 2017.
Increased information return penalties
Earlier in 2015, Congress substantially increased the penalties for businesses failing to file information returns. Each failure to prepare an information return now results in a $500 penalty. If intentional disregard applies, the penalty escalates to $1,000 per missed form. Businesses should review the list of potential information returns (follow the General Instructions for Certain Information Returns on the IRS website.) Common Form 1099 information return requirements include reporting of payments of fees to independent contractors and to attorneys, rent payments, and interest payments to individuals and other noncorporate taxpayers.
Increased small asset expensing
The repair regulations, effective in 2014, provided a safe harbor elective deduction for businesses under a two-tier system. Businesses with an Applicable Financial Statement (generally, a certified audit or a governmentally-mandated financial statement) are allowed to deduct small asset expenditures up to $5,000. Other businesses have a lower tier $500 safe harbor amount. The IRS recently announced an increase in the lower tier limit from $500 to $2,500, effective for tax years beginning in 2016. For more on this development, see our web article IRS Increases Small Asset Safe Harbor Expensing.
The Affordable Care Act and employers
Employers of all sizes are affected by this law. Beginning in 2015, those with 100 or more full-time and full-time equivalent employees must provide ACA-level group health coverage to their full-time employees. That threshold drops to 50 employees in 2016. All employers, other than those with only one health plan participant, are subject to a substantial penalty if they maintain arrangements that reimburse premiums on individual employee policies or use standalone Section 105 medical reimbursement plans.
New IRS reporting requirements begin in January 2016. Applicable large employers (ALEs) (i.e., employers with at least 50 full-time and full-time equivalent employees) must complete Form 1095-C for all employees who were full-time for any month beginning in 2015, even if no health insurance is provided. Form 1095-C reports extensive details of health coverage offerings to each full-time employee of the business. Our employee benefits professionals can help with these information returns, which are due to the employee at the end of January and to the IRS at the end of February.
Related party loans
Closely held business owners frequently have loans to and from their businesses. To be respected for tax purposes, any loan, whether between individuals or businesses, must include adequate interest, with interest payable at least annually. The IRS publishes monthly tables of minimum interest rates. For open demand notes (i.e., those without a specified repayment date), the minimum interest rate for 2015 is only 0.45 percent. While this rate is nominal, interest must be paid annually on all related party loans if the underlying transaction is to withstand IRS scrutiny.
If there is an upturn in interest rates, the IRS minimums adjust quickly. At that point, those with substantial related-party debt should consider converting to term debt at lower rates. For example, for a term loan originating in December 2015, a long-term note (any maturity longer than nine years) may have an annual interest rate as low as 2.61 percent.
Key individual provisions
Individual extenders made permanent
As with the business provisions, a number of individual extenders were made permanent by this week’s legislation. The more important include:
- The ability of individuals at least 70.5 years of age to exclude from gross income up to $100,000 of IRA amounts transferred directly to charity
- The itemized deduction for state and local sales taxes claimed in lieu of state income taxes, using either actual sales taxes incurred during the year or an IRS table amount
- The 1040 page one deduction for up to $250 of supplies purchased by elementary and secondary teachers. Beginning in 2016, the $250 limit is indexed, and professional development expenses are eligible.
- The enhanced charitable deduction for real property conservation easements
Enhancements to 529 college savings accounts
Effective in 2015 and after, the extender legislation permanently allows tax-free disbursements from 529 college savings plans for computers, software, and related technology during higher education years. Tuition paid from a 529 plan that is later refunded can be recontributed to the 529 plan within 60 days, preventing any adverse tax treatment as a result of the refund.
Charitable contribution documentation
When an IRS examination arises, a taxpayer’s compliance with charitable contribution documentation rules is often tested. Each separate check or other donation to charity of $250 or more must be supported by a written acknowledgement from the charity. This receipt or letter must indicate the amount of the contribution and contain the legend that no goods or services were provided by the charity to the donor in exchange for the contribution. This document must be in your hands by the date of the filing of your tax return. Property contributions are subject to more detailed reporting.
One IRA rollover per year rule
The IRS has revised its interpretation of the “one IRA rollover per year” rule, effective in 2015. This limit applies to an individual who takes a distribution check from an IRA and has possession of those funds before transferring the amount into a new or same IRA within the 60 day time limit. But the one rollover per year rule does not apply to funds moved via a trustee-to-trustee transfer, nor does it apply to taxable IRA-to-Roth IRA conversions. Because of the risks of this rule, as well as occasional errors when taxpayers attempt to execute their own rollovers, our advice is to always use the trustee-to-trustee approach when moving IRA funds from one account or institution to another.
How we can help
Our experienced tax professionals can help you understand how this legislation and other recent tax developments affect you and your business. Please contact your CLA tax advisor if you have questions.