On December 18, 2015, the House and Senate passed the PATH Act, otherwise known as "Protecting Americans from Tax Hikes Act of 2015." The act itself is extensive, so we'll touch on the points that we think have the most impact for taxpayers.
The PATH Act and individuals
State and Local Sales Tax Deduction
The provisions in this section allow a taxpayer to claim an itemized deduction for either payments towards state sales tax or payments to state and local governments. For instance, if you live in a state like Florida or Texas you have high sales tax but you don’t have any state income tax. Unfortunately, this means that you can’t itemize those deductions. But, if you live in a high income tax state like Connecticut or New York, you can deduct your income taxes. Looking at it, it's apparent that it's not quite fair because these taxes are still revenues that your state is generating (it's almost like you're being taxed on as many things as possible…).
Thankfully, the PATH Act will allow you to deduct the sales tax you pay in these states as opposed to not being able to deduct anything. If you live in a state that has an income tax and a sales tax, you do have to pick one (it's usually income tax that is higher).
Mortgage Debt Exclusion
The PATH Act excludes income from cancellation of mortgage debt on a principal residence of an amount up to $2 million ($1 million for a married taxpayer filing a separate return) through 2016. Please note, this only applies to your primary residence.
The PATH Act and businesses
Expensing (as related to section 179)
There's finally some great news for small/medium-sized business owners! This sections details how the expensing limit is set at $500,000 with a $2 million investment limit. Making capital improvements won't be counted against your net income, leaving you to reinvest into your company and grow your business.
Bonus depreciation adds to the amount of deductible depreciation; it goes above and beyond what would normally be available. It used to be taken right away, but now you can choose to deduct over time.
Work Opportunity Credit
The work opportunity credit is available to employers who hire individuals from certain target groups (the categories are listed on Form 5884).
Slight changes to the tax code can make a big difference
Some small business owners think it's the tax brackets that kill them, but that's not quite right. More often than not, it's paying taxes on money that isn't quite theirs, but might feel like it. Instead of simply paying federal taxes, it's important to note that there are other expenses to tack on – i.e., ObamaCare and state taxes that can drown unprepared businesses. Fortunately, there are so many other strategies you can employ, such as depreciation, expensing, and some of the credits available that can help you reinvest in your business.
Taking advantage of these options can be the difference between a failed business and a successful one. Make sure you investigate or mention what you think could be beneficial opportunities to your CPA or tax preparer as some of the stated changes are retroactive to 2015! We're not terribly fond of many of the laws passed by the Senate and the House, but the PATH Act is o.k. in our books.
If you need any assistance with a tax issue, contact us. We can help. Call us at 888-727-8796 or email firstname.lastname@example.org.