8 Ways Tax Planning Is Affected Under the PATH Act
Congress enacted the Protecting Americans from Tax Hikes Act (PATH) in December of 2015. This comprehensive Act includes over $620 billion in tax reductions for businesses and families.
It addresses over 50 temporary tax breaks – making some permanent and extending others through 2016 or longer. Although the Act addresses many issues, the following eight arguably affect the most people for tax planning purposes:
- Business Deductions. Section 179 of the tax code allows small businesses to immediately deduct up to $500,000 of investments. The PATH Act makes Section 179 limits permanent, while also indexing them to inflation.
- Bonus Depreciation. The current 50% business depreciation allowance has been extended through 2019. Businesses of all sizes can depreciate 50% of the cost of equipment acquired and put in service through 2017. Afterward, bonus depreciation will decrease to 40% percent in 2018 and 30% in 2019.
- Child Tax Credit. During the recent recession, Congress expanded the Child Tax Credit to families earning over $3,000. The PATH Act now makes the credit permanent.
- EITC. The Earned Income Tax Credit (EITC), a tax provision that benefits low-income families, was expanded during the latest recession. Over the past few years, two temporary provisions have made the EITC more generous for married couples and taxpayers with three or more children. The Path Act now makes the EITC permanent.
- American Opportunity Credit. The American Opportunity Tax Credit is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. It provides a maximum annual credit of $2,500 per student. Although it had been scheduled to expire in 2018, it has now been made permanent.
- R&E Credit. The most expensive provision in the PATH Act (over $100 billion) makes the research and experimentation (R&E) credit – which has been renewed 16 times over the past 35 years, permanent. The R&E credit allows businesses that engage in certain research activities to lower their overall tax burden.
- Active Financing Exception. U.S. businesses operating overseas are taxed by both foreign governments and the U.S. government. To mitigate that, the tax code has allowed corporations to defer taxes on some income earned by foreign subsidiaries. Congress instituted the active financing exception as part of the Taxpayer Relief Act of 1997 and the PATH Act makes the exception permanent.
- Charitable Distributions from IRAs. The provision allowing seniors over 70 ½ years old to distribute money directly from an IRA to a charitable organization without facing taxes has now been made permanent by the PATH Act.
The PATH Act is extremely comprehensive and encompasses much more than listed above. The bottom line is that tax professionals need to understand the nuances of how these changes affect the industry as a whole, and more importantly, their clients.
You can learn more about the new legislation and how it impacts tax practitioners by attending Surgent’s live CPE webinar: “Critical Tax Extender Update: Protecting Americans from Tax Hikes Act of 2015 (PROA).”