Estate and Succession Planning
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In what has replaced Santa Claus as the most anticipated December arrival [for U.S. taxpayers at least], Congress reached a bipartisan agreement to retroactively extend numerous tax benefits that expired at the end of last year. The Protecting Americans from Tax Hikes Act of 2015 (PATH) was announced by Congress late last night. PATH needs to be enacted by Congress and signed by President Obama before it becomes law.
Without relief, more than 50 individual, business and energy provisions, many of which have been in place for years, will expire for tax years after 2014. Generally, PATH will permanently extend some of these provisions while extending others for either one or five years. Below is a list of highlights from the bill that may be of interest to most taxpayers.
Permanent Extensions
If it becomes law, PATH will permanently extend the following expiring provisions.
State and Local Sales Tax Deduction – Taxpayers who itemize deductions may elect to deduct state and local general sales and use taxes instead of state and local income taxes. This provision is especially important for Florida residents who do not pay state income taxes and, therefore, would otherwise be unable to claim a deduction on their federal income tax return for state and local taxes paid.
Enhanced Child Tax Credit – For certain low income taxpayers, the $1,000 child tax credit (§24) can be refundable. The income eligibility threshold for a refundable credit was expanded through 2017.
Enhanced American Opportunity Tax Credit – For the 2009 through 2017 tax years, the amount of the Hope Scholarship Credit (§25A) was increased from $1,800 to $2,500. Further, the income phase-out threshold was increased making the credit available to more Americans.
Nontaxable IRA Transfers to Charity – Taxpayers who are 70 1/2 years or older can make tax free distributions of up to $100,000 directly to charity from an individual retirement account (IRA). A direct contribution from an IRA to charity is beneficial because the distribution will count towards an owner’s required minimum distribution. However, the contribution does not count as a distribution included in gross income or subject to limitations under §170 on charitable contributions.
Qualified Conservation Contributions – Qualified conservation contributions retain the special tax status first implemented in the Pension Protection Act of 2006. Qualified conservation contributions are grants of certain interests in real estate given to qualified charities for specific purposes. Generally, donations of real estate (a capital asset) are limited to 30% of a taxpayer’s income (10% for a corporation) and any unused deduction may be carried forward to the next five years.
Under PATH, the allowable income tax deduction for qualified charitable contributions will be increased to 50% of the taxpayer’s income and any unused deduction is carried forward for fifteen years. If the taxpayer is a “qualified farmer or rancher,” then the deduction limitation is increased to 100% of the taxpayer’s income if the taxpayer retains the right to use the property for agriculture or livestock production after the contribution. PATH will also extend these provisions to contributions by Alaska Native Corporations. For more information about qualified charitable contributions, please see our previous article.
Lower Shareholder Basis Adjustments for Charitable Contributions from S Corporations – Prior to the Pension Protection Act of 2006, when an S Corporation made a contribution of money or other property to a charity, each shareholder took into account his or her pro-rata share of the fair market value of the property contributed when determining his or her own income tax liability, and each shareholder’s basis in his or her stock was reduced by his or her pro-rata share of the charitable contribution. The Pension Protection Act of 2006 changed this rule to limit a shareholder’s basis reduction in S Corporation stock to his or her pro-rata share of the adjusted basis of the property contributed to charity.
Reduced S Corporation Built-In Gains Tax Recognition Period – Generally, when a C Corporation elects to become an S Corporation, the S Corporation will be taxed at the highest corporate rate on all built-in gains existing at the time of the conversion if the gain is subsequently recognized during the ten-year “recognition period.” For S Corporation tax years beginning in 2012, 2013 and 2014, the recognition period was reduced to five years. PATH will permanently extend the shortened five-year recognition period for taxable dispositions involving former C Corporations.
Increased §179 Deduction – A taxpayer generally may elect to claim an expense deduction rather than depreciate a certain amount of the cost of new or used tangible personal property placed into service in the taxpayer’s trade or business during the tax year. The maximum amount that may be expensed is reduced dollar-for-dollar to the extent the §179 property placed into service during the tax year exceeds the investment cap. PATH will permanently extend the $500,000 maximum expensing amount and the $2,000,000 investment cap for qualified property placed into service. In addition, PATH will index those amounts for inflation. Without this extension, the maximum amount that could have been expensed will drop to $25,000 and the investment cap will drop to $200,000.
PATH will also expand the type of property eligible for the deduction to air conditioning and heating units placed into service after 2015. For 2016 and beyond, PATH will eliminate the $250,000 cap on qualified real property.
Finally, PATH will make it easier to revoke an §179 election.
Exclusion of 100% of Gain on Certain Small Business Stock – Under §1202, a taxpayer may exclude all of the gain on the disposition of qualified small business stock acquired after September 27, 2010 and before January 1, 2015. Unless extended, the exclusion would have been limited to 50% of the gain for such stock. PATH will permanently extend this provision.
Long Term Extenders
If it becomes law, PATH will extend the following expiring provisions through the 2019 tax year.
Work Opportunity Tax Credit – The Work Opportunity Tax Credit (§51) permits employers who hire members of certain groups, including qualifying veterans, to claim a credit against income tax equal to a percentage of first year wages up to $24,000 per employee. The amount of the credit can vary depending upon the particular circumstances of the new employee. PATH will extend the credit through 2019 and will modify some of the provisions.
Bonus First Year Depreciation – PATH would extend the 50% first year bonus depreciation deduction (§168(k)) to qualified property acquired and placed into service by the end of 2017. PATH will extend and reduce the first year bonus depreciation to 40% for property placed into service in 2018 and to 30% for property placed into service in 2019. As a result, a taxpayer can accelerate depreciation deductions for certain newly-acquired property. Other than for certain, limited exceptions, the taxpayer must be the original user of the property. The bonus depreciation deduction is allowed for both regular tax and AMT purposes, but not for purposes of calculating earnings and profits.
PATH will also modify the first year bonus depreciation rules to permit bonus depreciation to be taken when certain nut and fruit bearing plants are planted or grafted.
PATH contains many other extension and modification provisions. A summary of PATH from the House Ways and Means Committee can be found here and the full text of PATH can be found here.
About the Author:
Brad Gould practices in the area of federal income, estate, and gift tax law and business succession planning. He represents businesses and business owners in all types of business and tax matters, including choice of entity, mergers and acquisitions, reorganizations, and other general business matters. Mr. Gould represents individuals, businesses and fiduciaries before the Internal Revenue Service and also counsels clients on estate and wealth preservation planning matters. Additionally, he represents trustees, personal representatives and family members in controversies regarding wills, trusts and estates. Mr. Gould is a Certified Public Accountant. He may be reached at (772) 464-7700 or bgould@www.deanmead.com.
