Obama Signs PATH Act Into Law: Several Major Incentives Become Permanent, Bonus Depreciation Extended
The “Protecting Americans from Tax Hikes Act of 2015” (PATH Act) was signed into law by President Obama on December 18, 2015. This Act contains a number of subsections that create tremendous opportunity for commercial real estate owners.
Over the years, tax extender packages have come and gone, extending incentives for a short period of time without guarantee of renewal. This has resulted in a constant state of uncertainty, interfering with a taxpayer’s planning and decision making processes. The PATH Act, however, makes permanent the R&D tax credit and the 15-year cost-recovery status of Qualified Leasehold Improvements (QLI), Qualified Restaurant Buildings and Improvements, and Qualified Retail Improvements (QRI). Furthermore, the Act extends bonus depreciation for five years and the 179D tax credit for two. This will allow taxpayers to proceed without hesitation when planning expansions, innovations, and energy-efficient improvements.
The legislation clocks in at a total of 233 pages, encompassing a broad swath of topics. The document in its entirety can be accessed through the House of Representatives website, at http://docs.house.gov/billsthisweek/20151214/121515.250_xml.pdf. Our discussion will focus on the incentives that pertain most specifically to the commercial real estate owner and their CPA.
First and foremost, Bonus Depreciation has been extended for a record five years. Immediate expensing of capital expenditures is such a powerful tool, and the PATH Act permits bonus depreciation at 50% for Tax Years 2015, 2016, and 2017 before being reduced to 40% in 2018 and 30% in 2019. Bonus depreciation has played a tremendous role in new construction projects over the years and being able to rely on these deductions will have a huge impact on overall tax planning strategy. The Act also allows taxpayers to continue to accelerate the use of AMT credits in lieu of bonus depreciation, and even increases the amount of AMT credits that may be used in this manner. Furthermore, the Act modifies bonus depreciation to include qualified improvement property and states that certain trees, vines and plants may be eligible for bonus depreciation when planted or grafted. For more, see Sec. 143., Extension and Modification of Bonus Depreciation.
Significantly, the Act also permanently extends 15-year straight-line cost recovery for Qualified Leasehold Improvements (QLI), Qualified Restaurant Buildings and Improvements, and Qualified Retail Improvements (QRI). See Sec. 123., Extension of 15-Year Straight-Line Cost Recovery for Qualified Leasehold Improvements, Qualified Restaurant Buildings and Improvements, and Qualified Retail Improvements.
The R&D Credit has been rolled over time and time again since the Reagan era, with no guarantee of renewal. The PATH Act permanently extends the research credit. Beginning in 2016, the Act will allow small businesses (less than $50M in gross receipts) to use the credit to offset alternative minimum tax (AMT) liability. Furthermore, certain small firms may even be able to offset payroll tax with this credit. For more, see Sec. 121., Extension and Modification of Research Credit.
EPAct 179D deductions have been extended for two years under the Act. For tax year 2015, the provision is reinstated retroactively, and will continue to use ASHRAE 90.1-2001 standards as a benchmark for determining the eligibility of a building’s energy-efficient improvements. In tax year 2016 however, buildings will be compared to ASHRAE standards 90.1-2007. The 2007 standards are very similar to those established in 2001, with the exception of more stringent interior lighting requirements – to meet the 2007 standards, taxpayers must show an average of 25% greater improvement in energy-efficiency. For more, see Sec. 190., Extension of Energy-Efficient Commercial Buildings Deduction. Also see Sec. 431., Updated ASHRAE Standards for Energy-Efficient Commercial Buildings Deduction.
The impact of the PATH Act is going to be felt in all areas of the commercial real estate world. Obviously, many of these changes will apply retroactively to 2015. The Capstan team will be in touch with all clients whose reports may require an update, and clients should certainly feel free to contact us with any questions or concerns.
We are currently scheduling new webinars to discuss the PATH Act, which will explore the pertinent legislation in detail and explain how to incorporate the relevant provisions into an existing 2015 tax strategy. The finalized schedule will be available in the Training section of our website and webinars will begin in January.
The last several months have been action-packed, and the Capstan team is committed to providing you with the most up-to-date information and industry-specific analysis. Keep an eye on the Blog, Training, and Tax Law Update sections of our website for breaking news, as well as a breakdown of how you may be affected.