Congress Permanently Extends Several Key Tax Breaks
On Friday, December 18, 2015, President Obama signed into law a massive bill authorizing $1.1 trillion in spending and $680 billion in tax cuts. While we have become accustomed to waiting until year-end (or sometimes new year) to see already-expired tax cuts temporarily revived, this new law actually makes permanent (or largely extends) several important tax breaks. For this reason, the Protecting Americans from Tax Hikes Act of 2015 is different from its predecessors. The new Act provides welcomed certainty for farm producers and others who often base purchasing or investment decisions on their tax consequences.
Signed into law almost one year to the date after last year’s Tax Increase Prevention Act of 2014, the new Act permanently implements, instead of temporarily resurrecting, several provisions of particular interest to farm producers. Following is a summary of the new Act’s key provisions.
Section 179 Deduction
Perhaps most important to farmers, the new Act permanently implements an enhanced “Section 179” deduction, sometimes called expense method depreciation. As of January 1, 2015, this deduction decreased to $25,000, with an investment ceiling of only $200,000. Amending I.R.C. § 179, the new Act allows farmers and small businesses to deduct $500,000 of the tax basis of certain business property or equipment during the year in which the property was placed into service. The spending cap is increased from $200,000 to $2 million, meaning that the deduction will begin a dollar-for-dollar phase-out only when the taxpayer spends more than $2 million on qualifying assets. These changes are implemented with a retroactive effective date of January 1, 2015. Future amounts will be indexed for inflation.
Although last year’s Tax Increase Prevention Act of 2014 ultimately allowed the same enhanced $500,000 deduction, the enhancement was effective for only the 2014 tax year. In other words, once the 2014 Act became law, the enhanced deduction was in place for only 12 days before expiring yet again. This was actually an improvement from the 2013 bill that restored certain deductions (including an enhanced §179 deduction) for a two-year period beginning with the 2012 tax year. This bill was not enacted into law until the 2012 tax year had already ended.
The 2015 Act (by making the enhanced §179 deduction permanent) ends the frustrating cycle of uncertainty accompanying large purchase decisions. This uncertainty had become the norm for small businesses. “Thinking” that a tax break will be restored is different from “knowing” that it has been restored. Thus, the new legislation finally supports the actual purpose of the enhanced tax deduction: to stimulate economic investment. This purpose is wholly thwarted when the tax break is not defined until it’s too late to even use it.
Farm producers, in particular, can take advantage of the enhanced §179 deduction when they purchase machinery and equipment, office equipment, livestock, grain bins, and single purpose agricultural structures such as hog barns. The deduction applies to purchases of new or used equipment. To claim the enhanced deduction for the 2015 tax year, the equipment or property, must have been placed in service in 2015 – ready for use in the taxpayer’s trade or business.
50 Percent Bonus Depreciation
The new Act also restores 50 percent bonus depreciation, but only for a time. This tax benefit had also expired at the end of 2014. Unlike the enhanced §179 deduction, however, 50 percent bonus depreciation has not been extended permanently. Instead, Congress has chosen to phase-out this benefit over a five-year period. Under this provision, producers can claim an additional first-year tax deduction equal to 50 percent of the value of qualifying property during tax years 2015, 2016, and 2017. Congress has then reduced the depreciation amounts to 40 percent in 2018 and 30 percent in 2019. Bonus depreciation is slated to disappear altogether for property placed into service in 2020 or later.
The bonus depreciation deduction, which is available only for new property, applies to farm buildings in addition to equipment. Unlike the §179 expense allowance, there is no limit on the overall amount of bonus depreciation that a producer may claim. If an item of property qualifies for both §179 expensing and bonus depreciation, the §179 expensing amount is computed first, and then bonus depreciation is taken based on the item’s remaining income tax basis. It is also important to note that §179 expensing is based on when the taxpayer’s tax year begins, whereas bonus depreciation is tied to the calendar year.
Built-In Gains Recognition Period
The new Act permanently extends a five-year recognition period for built-in gain for an S Corporation that has converted from a C Corporation. This provision permanently shortens the period during which an S Corporation may owe the BIG tax from 10 years to five years.
The new Act also permanently extends several long-offered provisions important to individuals. These include the enhanced child tax credit ($1,000 per qualifying child), the enhanced earned income tax credit, and the enhanced American Opportunity Tax Credit ($2,500 for four years of college expenses). Congress has also made permanent a provision granting teachers a $250 deduction for supplies purchased for their K-12 classrooms. This deduction is indexed for inflation. Also permanently extended by the new Act is the option to allow taxpayers to claim state and local sales tax instead of state and local income tax as an itemized deduction. Although this provision generally benefits those taxpayers from states without a state or local income tax, it can also benefit taxpayers who make a large purchase in a given tax year.
The new Act also permanently extends a key tax break for charitable giving. It allows taxpayers ages 70.5 and older to make tax free distributions from their IRAs to a qualified charity. This provision applies to distributions up to $100,000 per taxpayer (per spouse for married taxpayers that file as married filing jointly). Distributions in excess of the dollar limit still qualify as an itemized charitable deduction. The taxpayer, however, must claim the distribution as income.
This is a brief summary of a few provisions from the new Act that are most applicable to farm producers. The full legislation contains many additional tax and spending provisions. If you’re looking for a little year-end reading, you can access the 887–page tome here.
The Center for Agricultural Law and Taxation does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. The Center's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.