Obamacare (And Net Investment Income Tax) Repeal

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On January 4th, the United States Senate voted 51-48 on a motion to move forward with a budget resolution which instructs the authorizing committees to submit legislation.  Included in the measure was a reconciliation instruction that would allow most of the Affordable Care Act to be repealed on a simple majority vote in the Senate instead of the typical 60 vote majority.  Democrats used the budget reconciliation process in 2010 to pass large parts of Obamacare to avoid a Republican filibuster, however, there may be other parts of the law that cannot be repealed under the budget reconciliation process.  President Obama made an appearance on Capitol Hill on the same day to meet with Democrats from both chambers and instructed them to not assist Republicans to develop a new healthcare law.  Thus, it is unclear what will happen to the parts of Obamacare that were passed with a 60 vote Senate majority in 2010 since Senate Democrats are unlikely to cooperate with Republicans in drafting replacement legislation.

Included in the 2010 reconciliation process was the 3.8% Medicare tax on net investment income (unearned income of individuals, estates and trusts) to help subsidize the health care law. Beginning with tax year 2013, Married couples filing a joint return with modified adjusted gross income (MAGI) in excess of $250,000 and single taxpayers with MAGI in excess of $200,000 have been subject to the additional 3.8% tax.  For example, a married couple with wages of $225,000 and investment income (interest, dividends, capital gains, etc.) of $125,000 currently owe an additional $3,800 ($225,000 + $125,000 – $250,000 x 3.8%) in taxes when filing their individual income tax return.  Conversely, a single taxpayer would owe $4,750 with the same facts (MAGI is greater than $200,000 before factoring in any investment income therefore the entire $125,000 is subject to the 3.8% tax).  It is expected that this tax will be repealed as part of the health care overhaul in what will likely be one of several reforms to the tax code under a Trump administration.

Tax Consequences of Crowdfunding

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Background

Crowdfunding has quickly become a popular alternative to venture capital. In fact, a recent report published by Goldman Sachs described the practice as “potentially the most disruptive of all of the new models in finance.” Yet little is known about how such models are taxed. In a recent Information Letter, the IRS looked to general principles of income inclusion to explain the tax treatment of crowdfunding. However, given the fact-specific nature of crowdfunding arrangements, uncertainties still remain.

What Is Crowdfunding?

Crowdfunding is a way for businesses and entrepreneurs to solicit online contributions from multiple parties. This is typically accomplished through a crowdfunding platform such as Kickstarter (www.kickstarter.com) or AngelList (www.angel.co). Depending on the program, participants may receive “rewards” for their contributions. These are usually items of nominal value such as t-shirts or concert tickets. In some circumstances, contributors may receive an equity interest in the business or a right to have their contribution repaid with interest.Initially, crowdfunding was used primarily by musicians and filmmakers to fund projects that were unlikely to yield a profit. However, following the enactment of Title III of the Jumpstart Our Business Startups (JOBS) Act in 2012, the practice has expanded to a variety of industries. Title III created a federal exemption under the securities laws to permit companies to offer and sell securities through crowdfunding. Since that time, crowdfunding platforms have grown considerably, generating billions in capital for startups and small businesses.

Tax Characterization of Crowdfunding Contributions

As a general proposition, crowdfunding contributions are includible in income under IRC Sec. 61. This includes contributions constructively received by a company. However, depending on how the arrangement is structured, contributions may fall into one of the income exclusions provided by the Code. Accordingly, contributions characterized as loans, gifts, or capital contributions may be excluded.Loans. Crowdfunding contributions structured as loans are generally excludable from income. However, the arrangement should have sufficient debt-like features, such as an unconditional promise to pay, a fixed interest rate, and a specified maturity date. Arrangements where repayment depends on the financial success of the company or a particular project may be questioned by the IRS. Funds transferred without a bona fide repayment obligation will be includible in the recipient’s income, even if the parties characterize the deal as a loan.

Gifts. Crowdfunding contributions constituting gifts for federal tax purposes are excluded from the recipient’s income under IRC Sec. 102 . Gifts generally proceed from a “detached and disinterested generosity.”  Therefore, quid pro quo contributions in which the donor receives an economic benefit will not qualify as gifts.

Observation: Some crowdfunding platforms offer “rewards” in exchange for contributions. It is uncertain whether receipt of a reward negates an individual’s donative intent, especially when the item’s value is inconsequential. Although not directly on point, the IRS’s guidelines on quid pro quo charitable donations (which aren’t deductible) may be helpful. According to Rev. Proc. 2015-53, a benefit is de minimis and charitable contributions are fully deductible if the value of all benefits received by the donor is not more than 2% of the contribution, or $106 for 2016, whichever is less. In addition, if the contribution is at least $53 for 2016, and the donor receives token benefits costing no more than $10.60, the benefit is de minimis and the contribution will be fully deductible. Presumably, similarly de minimis rewards would not negate the donative intent for crowdfunding purposes.

If the contribution is a gift, the donor may be subject to gift tax depending on the amount of the contribution. Currently, there is an annual gift tax exclusion of $14,000 per person. Given that crowdfunding platforms generally attract multiple investors with often limited resources, it is likely that most participants will not pay gift tax.

Capital Contributions. The taxability of funds characterized as capital contributions generally depends on the tax classification of the business and whether the donor receives an equity interest. In the case of a corporation, gross income does not include any contribution to its capital.  If the donor receives stock as part of the deal, the corporation recognizes no gain or loss on the receipt of cash or other property. However, the donor may have to recognize gain if he contributes appreciated property to the corporation and does not own at least 80% of the entity following the transaction. This scenario is unlikely, however, because crowdfunding platforms generally support cash transactions only.

If the business is classified as a partnership for tax purposes, and the donor receives an equity interest as part of the deal, crowdfunding contributions are generally tax-free to both the entity and the donor.  Capital contributions to a partnership by nonowners, however, are generally includible in income.

Deductibility of Crowdfunding Expenses

Crowdfunding expenses commonly include service fees charged by the platform tasked with raising the funds. For example, Kickstarter charges a 5% fee if the project is successfully funded. There are also legal fees and other expenses, such as the rewards offered to contributors.As crowdfunding is typically associated with startup companies, some question whether such initiatives rise to the level of a trade or business under IRC Sec. 162(a). This stems from the fact that many projects are pursued with no reasonable expectation of profit. For businesses lacking a sufficient profit motive, crowdfunding expenses will be subject to the Section 183 hobby loss limitations.

Companies meeting the definition of an active trade or business will be allowed to deduct all ordinary and necessary expenses, including crowdfunding expenses. However, startup expenses are not immediately deductible. The taxpayer may elect to deduct up to $5,000 of these costs, but this is reduced by the amount by which total startup expenditures exceed $50,000 [IRC Sec. 195(b)(1) ]. Any startup costs remaining may be amortized ratably over 15 years.

Reporting Concerns

Crowdfunding participants may wonder if contributions are reported to the IRS. In general, payment settlement entities are required by IRC Sec. 6050W to annually report the gross amount of payments made in settlement of credit card, debit card, and other payment card transactions on Form 1099-K. Transactions handled by third-party payers, such as crowdfunding platforms, may be exempt from filing Form 1099-K if the payments to the payee are under $20,000 or there are fewer than 200 transactions with the payee within the calendar year.Observation: As a practical matter, many crowdfunding platforms will be exempt from reporting requirements. However, some crowdfunding websites publicize contribution amounts for a particular project and may disclose the names of contributors as well.

Information Letter 2016-0036

In Information Letter 2016-0036, the IRS examined the tax consequences of crowdfunding. As is common with Information Letters, the facts have been redacted. However, it appears the taxpayer received crowdfunding contributions to purchase a company. Aside from the taxability of the contributions, the taxpayer questioned the applicability of the constructive receipt doctrine because funds may have to be returned to participants.As you would expect, the IRS concluded that the tax consequences of a crowdfunding effort depend on all the facts and circumstances surrounding that effort. In general, revenues from crowdfunding are includible in income unless they constitute loans, capital contributions in exchange for equity interests, or gifts. (The IRS clarified that a voluntary transfer without a quid pro quo is not necessarily a gift for federal income tax purposes.) In addition, crowdfunding revenues are taxable if they are received for services rendered or represent gains from property sales. In the end, the IRS looked to general principles of income inclusion to arrive at a somewhat vague conclusion.

Conclusion

To date, there are no court cases or IRS rulings that directly address the taxability of crowdfunding contributions. However, Information Letter 2016-0036 provides some insight into how the IRS views the subject. For now, it is safe to say that crowdfunding contributions will be taxable unless they are loans, gifts, or capital contributions. Practitioners will need to pay particular attention to the facts to determine proper treatment.

Airbnb Hosts: Tips for Tracking and Reporting Your Rental Income

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Founded in 2008, Airbnb is a marketplace for people to list and rent unique accommodations around the world. It has grown in popularity over the last few years and presents many tax reporting questions for hosts who are earning money from renting out their homes.  Here are some tips for reporting income from Airbnb.

First and foremost, hosts should keep detailed records of all income and expenses. This will be helpful not only for you and your tax preparer, but vital in the case of an IRS audit.  Some typical expenses that a host may incur would include advertising, cleaning and maintenance, utilities, home owner’s insurance, property taxes and interest on loans and mortgages. You should not rely on Airbnb to issue you a tax form for your income earned.  Airbnb only issues 1099s if someone meets one of the following criteria:

  1. US persons who have earned over $20,000 and had 200+ reservations
  2. Non-US persons who have submitted a Form W-8
  3. Hosts that had funds withheld from their payouts for taxes

It is also important to note that owners might not have to report any Airbnb income on their tax forms at all if their residences are rented out for fewer than 15 days per year. This has become popular for events where hotel rooms might not be available, like in Dublin, Ohio during the Memorial Tournament or Cleveland, Ohio during the Republican National Convention.

As always, consult your tax advisor with any questions you have about reporting Airbnb or any other rental income.

ARM Mid-Year Tax Planning Series (4 of 4): Don’t Pass up Tax-free Income

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Take Advantage of Retirement Plan Options. The earnings on most retirement accounts are tax-deferred. (With Roth IRAs, they’re normally tax-free.) Thus, the sooner you fund such an account, the quicker the tax advantage begins. If you can come up with the cash now, there’s no need to wait until year-end or the April 15 tax filing deadline to make your 2016 contributions. However, if your employer offers a 401(k) or SIMPLE-IRA plan at work, you’ll probably want to contribute enough to that plan to receive a full employer match before making an IRA contribution.

Invest in Tax-free Securities. The most obvious source of tax-free income is tax-exempt securities, either owned outright or through a mutual fund. Whether these provide a better return than the after-tax return on taxable investments depends on your tax bracket and the market interest rates for tax-exempt investments. These factors change frequently, so it’s a good idea to periodically compare taxable and tax-exempt investments. In some cases, it may be as simple as transferring assets from a taxable to a tax-exempt fund. ARM recommends discussing your investment options with your financial advisor.

Make Charitable Donations from IRAs. If you’ve reached age 70½, you can arrange to have up to $100,000 of otherwise taxable IRA money paid directly to specified tax-exempt charities. These so-called Qualified Charitable Distributions (QCDs) are federal-income-tax-free to you, but you don’t get to claim any itemized deductions on your Form 1040. However, the tax-free treatment equates to a 100% writeoff, and you don’t have to itemize your deductions to get it. Furthermore, you can count the distribution as part of your required minimum distribution that you’d otherwise be forced to receive and pay taxes on this year. Be careful though—to qualify for this special tax break, the funds must go directly between your IRA and the charity.

ARM Mid-Year Tax Planning Series (3 of 4): Maximize Your Business Deductions

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Take Advantage of the Generous Section 179 Deduction and First-year Bonus Depreciation. Under the Section 179 deduction privilege, an eligible business can often claim first-year depreciation write-offs for the entire cost of new and used equipment and software additions and eligible real property costs. For tax years beginning in 2016, the maximum 179 deduction is $500,000. However, this maximum deduction is reduced to the extent you purchase more than $2.01 million of qualifying property during the tax year. Also, a much lower limit applies for amounts that can be deducted for most vehicles.

Above and beyond the Section 179 deduction, your business can also claim first-year bonus depreciation equal to 50% of the cost of eligible new (not used) equipment and software placed in service by the end of this year.

Note: You cannot claim a Section 179 write-off that would create or increase an overall tax loss from your business. This limit does not apply to first-year bonus depreciation deductions, which can create or increase a Net Operating Loss (NOL) for your business’s 2016 tax year. You can then carry back the NOL to 2014 and/or 2015 and collect a refund of taxes paid in one or both those years. Please contact us for details on the interaction between asset additions and NOLs.

Consider Selling Rather Than Trading-in Vehicles Used in Business. Although a vehicle’s value typically drops fairly rapidly, the tax rules limit the amount of annual depreciation that can be claimed on most cars and light trucks. Thus, when it’s time to replace the vehicle, it’s not unusual for its tax basis to be higher than its value. If you trade the vehicle in on a new one, the undepreciated basis of the old vehicle simply tacks onto the basis of the new one (even though this extra basis generally doesn’t generate any additional current depreciation because of the annual depreciation limits). However, if you sell the old vehicle rather than trading it in, any excess of basis over the vehicle’s value can be claimed as a deductible loss to the extent of your business use of the vehicle.

Consider Reimbursing Employees’ Out-of-pocket Business Expenses. Employees normally receive little or no tax benefit from paying business expenses because they’re deductible only to the extent they exceed (1) 2% of the employee’s adjusted gross income and, (2) when combined with the employee’s other itemized deductions, the employee’s standard deduction. Thus, for example, an employee whose compensation is $2,000 higher than it would otherwise be because he’s expected to incur about $2,000 in unreimbursed business expenses isn’t being fairly compensated for the out-of-pocket expense. After paying income and payroll taxes on the $2,000, he has less than this amount to spend on the business expenses. A better approach would be for the company to reimburse at least part of the employee’s business expenses (and renegotiate the employee’s compensation accordingly). Because properly documented expense reimbursements aren’t considered compensation, both the company and the employee save payroll taxes on this arrangement. Plus, the employee comes out better on income taxes as well.

Set up a Retirement Plan. If your business doesn’t offer a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant deductible contributions. Even if your business is only part-time or something you do on the side, contributing to a SEP-IRA or SIMPLE-IRA can enable you to reduce your current tax load while increasing your retirement savings. With a SEP-IRA, you generally can contribute up to 20% of your self-employment earnings, with a maximum contribution of $53,000. A SIMPLE-IRA, on the other hand, allows you to set aside up to $12,500 plus an employer match that could potentially be the same amount. In addition, if you’re age 50 or older by year-end, you can contribute an additional $3,000 to a SIMPLE-IRA.

ARM Mid-Year Tax Planning Series (2 of 4): Make the Standard Deduction Work for You

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Make the Standard Deduction Work for You

The tax rules allow you a deduction equal to the greater of your itemized deductions or a flat amount known as the standard deduction. Thus, itemized deductions only lower your taxable income to the extent they exceed the standard deduction. For 2016, the standard deduction is $12,600 for married taxpayers filing joint returns. If you are single, the amount is $6,300 (unless you qualify as head of household, in which case it’s $9,300). If you’re at least 65, you receive an additional standard deduction of $1,250 if you’re married (plus another $1,250 if your spouse is also 65 or older) or an additional $1,550 if you’re single. In 2017, these amounts will all likely be slightly higher after adjustment for inflation.

If your total itemized deductions are normally close to whichever standard deduction applies to you, you may be able to leverage the benefit of your deductions by bunching them in every other year. This allows you to time your itemized deductions so that they are high in one year and low in the next. You claim actual expenses in the year they are bunched and take the standard deduction in the intervening years. (Deductions you may be able to shift between years include charitable contributions and your state and local income and property taxes. However, watch out for AMT, as these taxes aren’t deductible for AMT purposes.)

ARM Mid-Year Tax Planning Series (1 of 4): Take a Look at Your Investments

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The 2016 federal income tax rates on long-term capital gains and qualified dividends are 0%, 15%, and 20%, with the maximum 20% rate affecting taxpayers with taxable income above $415,050 for single taxpayers, $466,950 for married joint-filing couples, and $441,000 for heads of households. High-income individuals can also be hit by the 3.8% NITT, which can result in a marginal long-term capital gains/qualified dividend tax rate as high as 23.8%. Still, that is substantially lower than the top regular tax rate of 39.6% (43.4% if the NITT applies).

Holding on Longer Can Lower Your Taxes. If you hold appreciated securities in taxable accounts, owning them for at least one year and a day is necessary to qualify for the preferential long-term capital gains tax rates. In contrast, short-term gains are taxed at your regular rate, which can be as high as 39.6% (43.4% if the NITT applies). Be sure to consider this when evaluating your investment portfolio. Whenever possible, try to meet the more-than-one-year ownership rule for appreciated securities held in your taxable accounts. (Of course, while the tax consequences are important, they should not be the only consideration for making a buy or sell decision.)

Sell the Right Shares. Generally, when you sell stock or mutual fund shares, the shares you purchased first are considered sold first, which is good news if you are trying to qualify for the long-term capital gain rate. But, there may be situations where you’re better off selling shares that have been held a year or less rather than those held longer. Selling recently purchased shares at little or no gain (because you purchased them at a higher price) may be better than selling shares held for more than one year if that sale would produce a significant gain. Whenever you want to sell shares other than those you purchased first, you must properly notify your broker as to the specific shares you want sold.

Where Your 2015 Income Tax Dollars Went

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The National Priorities Project (NPP) completed a study to uncover what the American taxpayer dollars went towards in 2015. According to the analysis, the $4.2 trillion dollar federal budget in 2015 was allocated to a variety of different areas such as defense, housing, and education. The NPP prepared their study by allocating how much was spent in each category and applying those percentages to the average American’s federal tax bill of $13,000.

Of the $13,000 average, the federal government spent:

  1. $3,728.92 on health programs (28.7%)
  2. $3,299.13 on the Pentagon and the military (25.4%)
  3. $1,776.06 on interest on the debt (13.7%)
  4. $1,040.93 on unemployment and labor programs (8%)
  5. $771.26 on veteran’s benefits (5%)
  6. $598.74 on food and agriculture programs (4.6%)
  7. $461.59 on education programs (3.6%)
  8. $377.50 on government expenses (2.9%)
  9. $250.03 on housing and community programs (1.9%)
  10. $207.68 on energy and environmental programs (1.6%)
  11. 194.29 on international affairs programs (1.5%)
  12. $150.68 on transportation funding (1.2%)
  13. $143.20 on science funding (1.1%)

For those who want more detailed information about their personal federal taxes paid, NPP has created a feature that allows taxpayers to see exactly how much of their own bill went to the areas shown above (broken out into more detail) by plugging their federal taxes paid amount into the NPP’s federal tax receipt calculator here: federal tax receipt calculator.

2016 Ohio Sales Tax Holiday

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On Wednesday, April 27, the Ohio House of Representatives joined the Ohio Senate in approving the back-to-school Sales Tax Holiday for the second year in a row. This Year’s Sales Tax Holiday will fall during the days of August 5th through August 7th. The bill, known as Senate Bill 264, now just needs Governor John Kasich’s signature to be official.

According to a study by the University of Cincinnati Economics Center, last year’s Ohio Sales Tax Holiday generated $4.7 million in sales tax revenues statewide and saved taxpayers $3.3 million on $46.75 million of back-to-school related purchases. The study also showed a measureable increase in sales of Ohio counties that border other states. These counties experienced a 15.48 percent increase in their sales tax collections, compared to an increase of 4.56 percent in non-border counties. This large number of “cross-border” sales is due to Ohio being the only state in the Midwest to offer a sales tax holiday on back-to-school items.

The bill uses nearly the exact same language as last year’s Sales Tax Holiday, letting shoppers purchase clothing priced at $75 or less, school supplies priced at $20 or less, and school instructional materials priced at $20 or less without paying state or local sales tax. Also similar to last year, this event will be open to everyone shopping at Ohio stores, not just families with children attending school.

Keep in mind there are a few stipulations to this holiday. Most notably, any item used in a trade or business is not eligible for the tax exemption. For example, school supplies such as binders and notebooks to be used in a business are ineligible. Additionally, clothing accessories including jewelry and handbags do not qualify as clothing and are therefore not exempt from sales tax.

Items sold by mail, phone, or the Internet will qualify for the tax holiday if the consumer orders and pays for the item and the retailer accepts the order during the holiday period.  Shipping and handling charges shall also be exempt from sales tax if all items in the order qualify for the exemption. If some of the items in the order are ineligible, sales tax will be charged on the shipping and handling costs of those specific items.

 

 

Tax Extenders – PATH Act of 2015

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On December 16, Finance Committee Chairman Orrin Hatch (R-UT), House Ways and Means Committee Chairman Kevin Brady (R-TX), and Senate Finance Committee Ranking Member Ron Wyden (D-OR) announced that an agreement had been reached on extenders and other tax provisions in the “Protecting Americans from Tax Hikes (PATH) Act of 2015.” The bipartisan, bicameral deal makes permanent many of the extenders—i.e., the 50 or so temporary tax provisions that are routinely extended by Congress on a one- or two-year basis and that have been expired since the end of 2014. A number of other extender provisions are extended through 2019, while others are extended for two years through 2016.  The agreement is expected to be quickly passed by Congress and signed into law by the President.

PATH Act provisions include the following:

Extension of tax-free distributions from individual retirement plans for charitable purposes. The provision permanently extends the ability of individuals at least 70½ years of age to exclude from gross income qualified charitable distributions from Individual Retirement Accounts (IRAs). The exclusion may not exceed $100,000 per taxpayer in any tax year.

Extension of 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements. The provision permanently extends the 15-year recovery period for qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property.

Extension and modification of increased expensing limitations and treatment of certain real property as section 179 property. The provision permanently extends the small business expensing limitation and phase-out amounts in effect from 2010 to 2014 ($500,000 and $2 million, respectively). These amounts currently are $25,000 and $200,000, respectively. The special rules that allow expensing for computer software and qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) also are permanently extended. The provision modifies the expensing limitation by indexing both the $500,000 and $2 million limits for inflation beginning in 2016 and by treating air conditioning and heating units placed in service in tax years beginning after 2015 as eligible for expensing. The provision further modifies the expensing limitation with respect to qualified real property by eliminating the $250,000 cap beginning in 2016.

Enhanced child tax credit made permanent. The child tax credit (CTC) is a $1,000 credit. To the extent the CTC exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit (the additional child tax credit) equal to 15 percent of earned income in excess of a threshold dollar amount (the “earned income” formula). Until 2009, the threshold dollar amount was $10,000 indexed for inflation from 2001 (which would be roughly $14,000 in 2015). Since 2009, however, this threshold amount has been set at an unindexed $3,000 and is scheduled to expire at the end of 2017, returning to the $10,000 (indexed for inflation) amount. The provision permanently sets the threshold amount at an unindexed $3,000.

Enhanced American opportunity tax credit made permanent. The Hope Scholarship Credit is a credit of $1,800 (indexed for inflation) for various tuition and related expenses for the first two years of post-secondary education. It phases out for AGI starting at $48,000 (if single) and $96,000 (if married filing jointly) – these amounts are also indexed for inflation. The American Opportunity Tax Credit (AOTC) takes those permanent provisions of the Hope Scholarship Credit and increases the credit to $2,500 for four years of post-secondary education, and increases the beginning of the phase-out amounts to $80,000 (single) and $160,000 (married filing jointly) for 2009 to 2017. The provision makes the AOTC permanent.

Extension and modification of deduction for certain expenses of elementary and secondary school teachers. The provision permanently extends the above-the-line deduction (capped at $250) for the eligible expenses of elementary and secondary school teachers. Beginning in 2016, the provision also modifies the deduction to index the $250 cap to inflation and include professional development expenses.

Extension of deduction of State and local general sales taxes. The provision permanently extends the option to claim an itemized deduction for State and local general sales taxes in lieu of an itemized deduction for State and local income taxes. The taxpayer may either deduct the actual amount of sales tax paid in the tax year, or alternatively, deduct an amount prescribed by the Internal Revenue Service (IRS).

Extension and modification of research credit. The provision permanently extends the research and development (R&D) tax credit. Additionally, beginning in 2016 eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax (AMT) liability, and the credit can be utilized by certain small businesses against the employer’s payroll tax (i.e., FICA) liability.

Extension of exclusion of 100 percent of gain on certain small business stock. The provision extends the temporary exclusion of 100 percent of the gain on certain small business stock for non-corporate taxpayers to stock acquired and held for more than five years. This provision also permanently extends the rule that eliminates such gain as an AMT preference item.

Extension of reduction in S-corporation recognition period for built-in gains tax. The provision permanently extends the rule reducing to five years (rather than ten years) the period for which an S corporation must hold its assets following conversion from a C corporation to avoid the tax on built-in gains.

Extension and modification of exclusion from gross income of discharge of qualified principal residence indebtedness. The provision extends through 2016 the exclusion from gross income of a discharge of qualified principal residence indebtedness. The provision also modifies the exclusion to apply to qualified principal residence indebtedness that is discharged in 2017, if the discharge is pursuant to a written agreement entered into in 2016.

Extension of mortgage insurance premiums treated as qualified residence interest. The provision extends through 2016 the treatment of qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction. This deduction phases out ratably for a taxpayer with AGI of $100,000 to $110,000.

Extension of above-the-line deduction for qualified tuition and related expenses. The provision extends through 2016 the above-the-line deduction for qualified tuition and related expenses for higher education. The deduction is capped at $4,000 for an individual whose AGI does not exceed $65,000 ($130,000 for joint filers) or $2,000 for an individual whose AGI does not exceed $80,000 ($160,000 for joint filers).

Improvements to section 529 accounts. The provision expands the definition of qualified higher education expenses for which tax-preferred distributions from 529 accounts are eligible to include computer equipment and technology. The provision modifies 529-account rules to treat any distribution from a 529 account as coming only from that account, even if the individual making the distribution operates more than one account. The provision treats a refund of tuition paid with amounts distributed from a 529 account as a qualified expense if such amounts are re-contributed to a 529 account within 60 days. The provision is effective for distributions made or refunds after 2014, or in the case of refunds after 2014 and before the date of enactment, for refunds re-contributed not later than 60 days after date of enactment.

Rollovers permitted from other retirement plans into simple retirement accounts. The provision allows a taxpayer to roll over amounts from an employer-sponsored retirement plan (e.g., 401(k) plan) to a SIMPLE IRA, provided the plan has existed for at least two years. The provision applies to contributions made after the date of enactment.

Other provisions include:

Enhanced earned income tax credit made permanent.

Extension of parity for exclusion from income for employer-provided mass transit and parking benefits.

Extension and modification of special rule for contributions of capital gain real property made for conservation purposes.

Extension and modification of charitable deduction for contributions of food inventory.

Extension of modification of tax treatment of certain payments to controlling exempt organizations.

Extension of basis adjustment to stock of S corporations making charitable contributions of property.

Extension and modification of employer wage credit for employees who are active duty members of the uniformed services.

Extension of treatment of certain dividends of regulated investment companies.

Extension of subpart F exception for active financing income.

Extension of temporary minimum low-income housing tax credit rates for non-Federally subsidized buildings.

Extension of military housing allowance exclusion for determining whether a tenant in certain counties is low-income.

Extension of RIC qualified investment entity treatment under FIRPTA.

Extension of new markets tax credit.

Extension and modification of work opportunity tax credit.

Extension and modification of bonus depreciation.

Extension of look-thru treatment of payments between related controlled foreign corporations under foreign personal holding company rules.

Extension of Indian employment tax credit.

Extension and modification of railroad track maintenance credit.

Extension of mine rescue team training credit.

Extension of qualified zone academy bonds.

Extension of classification of certain race horses as 3-year property.

Extension of 7-year recovery period for motorsports entertainment complexes.

Extension and modification of accelerated depreciation for business property on an Indian reservation.

Extension of election to expense mine safety equipment.

Extension of special expensing rules for certain film and television productions

Extension of deduction allowable with respect to income attributable to domestic production activities in Puerto Rico.

Extension and modification of empowerment zone tax incentives.

Extension of temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands.

Extension of American Samoa economic development credit.

Moratorium on medical device excise tax.

 

Please contact our office if you would like a complete list of the PATH Act of 2015 provisions.   Have a safe Holiday Season!

ARM CPA