The Protecting Americans from Tax Hikes (PATH) Act of 2015 signed into law in late 2015 addresses several items, including certain tax provisions that expired at the end of 2014. In previous bills, Congress chose to extend “sunsetting” provisions for an additional year. Often, this legislation was enacted so late in the calendar year that taxpayers could not reasonably rely on the tax incentive associated with a particular provision.
The PATH Act resolves some of this uncertainty by extending several provisions—some permanently, others for several years. More importantly, the legislation indicates that Congress can work together to accomplish something meaningful to individuals and businesses alike.
The provisions specific to insurers relate to captives (see below) and the Subpart F exception for active financing income (a permanent extension). However, a few other provisions of interest to insurers are worth highlighting as well.
Section 179 Expensing Limitations & Treatments (permanent extension)
From 2010 through 2014, preferential limitations were in place for Internal Revenue Code Section 179 expensing of assets. Prior to the PATH Act, taxpayers faced a dramatically lower expensing limit and phase-out threshold in 2015. However, the provisions in this legislation restore the $500,000 expense limit and $2 million asset phase-out limit for the 2015 tax year. For tax years 2016 and later, these values are indexed for inflation. Rules regarding expensing of certain computer software and qualified real property also are permanently extended. In addition, air conditioning and heating units in service after the 2015 tax year will be eligible for §179 expensing. Lastly, the act modifies the expensing limit for qualified real property for tax years 2016 and later by eliminating the $250,000 cap.
Bonus Depreciation (extension through 2019)
Bonus depreciation is extended once again, but provisions for phaseout of the benefit were written into this legislation. For tax years 2015 through 2017, 50 percent bonus depreciation is allowable. The rate is reduced to 40 percent for 2018 and 30 percent for 2019. For tax years 2020 and later, bonus depreciation won’t be available, absent future legislation. Many of the previous rules regarding eligible assets and acceleration of alternative minimum tax (AMT) credits in lieu of bonus depreciation remain intact for the 2015 tax year. The 2016 tax year will see an acceleration of the AMT credit amount available for use in lieu of bonus depreciation.
Research Credit (permanent extension)
The PATH Act makes permanent and expands the application of the research and experimentation (R&E) credit, eliminating a perennial uncertainty. The permanent extension applies to tax years 2015 and later. Modifications to the R&E credit include the ability for eligible small taxpayers—those with $50 million or less in gross receipts—to apply the credit against AMT and for small startup businesses with limited taxable income to apply the credit earned against their payroll tax liability, up to $250,000. To qualify for the credit against payroll tax, a taxpayer must have less than $5 million of gross receipts in the current taxable year and not have any gross receipts for any year prior to five taxable years ending with the current year. These modifications are effective for tax years 2016 and later.
Changes for Small Insurance Companies (effective for tax years beginning after December 31, 2016)
Modifications for small insurance companies wholly owned and controlled by their insureds (commonly referred to as captive insurance companies) limit the amount of annual premiums these companies can receive and still elect to be exempt from tax on their underwriting income. The premium limit is increased to $2.2 million from $1.2 million for tax years after 2016, adjusted for inflation thereafter. To help prevent abuse, the act adds a diversification requirement for companies to be eligible for the §831(b) small insurance company “alternative tax” election. Under these rules, one of the following requirements must be met:
- Risk Diversification Test – No single policyholder may make up more than 20 percent of the greater of net written premiums or direct written premiums of the insurer (attribution rules apply for related entities).
- Relatedness Test – Owners of the insured must own a share of the business equal to or greater than what they own in the insurer. This ownership test only applies to a spouse and lineal descendants (including by adoption); a 2 percent de minimis exception also applies. This test is included to address perceived abuses of captive insurance companies for estate planning purposes.
Any insurance company for which a §831(b) election is in effect will be required to report certain information as required by the IRS relating to the diversification requirements for tax years beginning after December 31, 2016.
This article doesn’t cover even a fraction of the changes in the legislation. The provisions generally were favorable to taxpayers and aimed at simplifying the complicated task of applying the tax code to business and financial decisions. Finance Committee member Ron Wyden, one of the congressmen responsible for drafting the legislation, promised additional changes in the near future, saying this law was simply “a down payment on tax reform.”
For more information on how this legislation could affect your company, contact your BKD advisor.