The Protecting Americans from Tax Hikes (PATH) Act was signed into law and enacted in December 2015 and is considered to be taxpayer-friendly, encompassing several provisions that affect both individuals and businesses.
The PATH Act renewed many of the temporary tax provisions that had previously expired. Some
provisions were made permanent; some were extended through the end of 2016; and some were extended through the end of 2019.
It is a juggling act to keep up with the new provisions – 115 in all – and trying to make sense of whether one or more will affect you now, or in the future, can be boggling real challenge. Here are a few of the more significant provisions that could impact your current year taxes:
Business Provisions
Permanent Expansion of the Section 179 Deduction
Section 179 of the tax code allows small businesses to immediately deduct up to $500,000 of certain depreciable business assets, with a $2 million overall investment limit before a phase-out.
Without the new tax law, the maximum deduction available would have been $25,000 of investments, with an investment limit of $200,000. The PATH Act made the expanded Section 179 limits permanent and progressive by indexing them to inflation.
Bonus Depreciation Extension
The Act extended this provision through 2019, rather than making it permanent. The bonus depreciation provision allows all businesses to immediately deduct 50% of the cost of qualified property acquired and placed in service during the tax year. The percentage decreases to 40% in 2018 and to 30% in 2019.
The Research and Development Credit (R&D) is Permanent
The R&D tax credit allows businesses that engage in certain research activities to lower their overall tax burden by allowing a credit to offset tax liability based on qualified costs. This credit had expired and was renewed 16 times, and had limited application. PATH may have changed all that by making changes to the R&D credit that represent some of the most taxpayer-friendly provisions in the Act. The credit was not only extended and made permanent by the Act, but expanded and made available to many businesses not previously eligible to take advantage of this benefit.
Some of the modifications, which became effective as of January 1, 2016, include the following:
- Credit Allowed Against Alternative Minimum Tax – The R&D Credit will now be allowed to offset the Alternative Minimum Tax (AMT) in the case of eligible small businesses or owners.
An eligible small business under this provision is defined as a private company with average annual gross receipts not exceeding $50 million for the prior three years. The R&D tax credit for pass-through entities, such as S Corporations, LLCs and Partnerships, which meet this threshold will be available to the members, partners or shareholders to reduce their personal income tax liabilities, even if they are subject to AMT tax. Any unused credits can be carried back one year and forward 20 years.
- Payroll Tax Credit Available for Start-Up Businesses – The modified law now allows qualified small businesses to elect to utilize the R&D credit to reduce their FICA tax liability. A qualified small business is defined as a Corporation, Partnership, LLC or Sole Proprietorship which is less than five years old, with less than $5 million in annual gross receipts in each of the preceding five years. The Payroll Tax Credit will be refundable up to $250,000 in payroll taxes per year. Any excess credit can be carried forward to future years.
By making the credit permanent and expanding its application, the Act has given a lift to the often overlooked yet valuable R&D tax credit.
NEW DUE DATES FOR 1099s AND W-2s
The Protecting Americans from Tax Hikes (PATH) Act of 2015 modified filing dates of returns and statements relating to employee and non-employee compensation, and created a safe harbor on de-minimis errors on information returns and payee statements effective for the 2016 filing season.
The 2015 PATH Act implemented new filing deadlines for Forms W-2, W-3 and 1099-MISC, which are used to report employee and non-employee compensation. The due date for government copies of such forms to be filed with either the Social Security Administration (SSA) or the Internal Revenue Service (IRS) is now January 31.
Prior to the PATH Act’s enactment, the government copies of Forms W-2 and 1099 were required to be filed on or before the last day of February, if filed using a paper form, and on or before the last day of March, if filed electronically.
The accelerated filing rule applies to both paper and electronic filed returns and statements that relate to calendar years beginning on January 1, 2016.
The change affects only those Forms 1099-MISC that report non-employee compensation. The filing deadline for other forms in the 1099 series remains unchanged.
Filers are allowed an automatic extension to file with the IRS or SSA, but still must mail the payee copies by January 31. Filers can take advantage of an automatic 30-day extension by filing Form 8809, “Application for Extension of Time to File Information
Returns,” before the due date. Filers are also allowed an additional non-automatic 30-day extension, which must be requested before the automatic extension expires.
Failure to comply with the new filing deadlines may expose a business to substantial IRS penalties.
The PATH Act also establishes a safe harbor from penalties for the failure to file correct information returns and for failure to furnish correct payee statements by providing that if the error is $100 or less ($25 or less in the case of errors involving tax withholding), the issuer of the information is not required to file a corrected return and no penalty will be imposed. However, a recipient of a 1099 or W-2 with an error can elect to have a corrected form issued and filed, regardless of the amount.
This new law is a significant change in filing dates and will affect most employers and all businesses that issue 1099’s to consultants. All payors should take note and indicate/record the new filing dates.