Tax Words MedIt has become a tradition that at the end of each year, Congress passes legislation to extend previous legislation. In late 2015, Congress passed Public Law 114-113, which contains the Protecting Americans from Tax Hikes Act (“PATH”). PATH’s benefits to donors and charities were detailed in a previous post, which is available here: Donors and Charities Benefit Under New Tax Legislation. This post focuses on noteworthy extenders for S corporations.

The three most important sections for S corporations (and S corporation shareholders) in PATH include the built-in gains (“BIG”) tax, bonus depreciation, and contributions to charity.

  1. BIG recognition period set at five years permanently, IRC §1374: This provision is beneficial because it permanently reduces the amount of time that an S corporation’s assets are subject to the BIG tax (and its taint). The BIG tax imposes a corporate-level tax on the inherent gain in an S corporation’s assets for a prescribed time. The BIG tax taints the S corporation’s assets, and applies if the S corporation converted from a C corporation or received assets from a C corporation. If the S corporation sells or otherwise disposes of those assets during the recognition period, the BIG tax applies. The recognition period was 10 years, but has fluctuated between five years (tax years 2012-2014) and seven years (tax years 2009-2011). This provision makes the recognition period for the BIG tax permanent at five years, and is effective for tax years beginning after December 2014.
  2. Bonus depreciation continues through 2019, IRC §168(k): This provision is beneficial because it extends bonus depreciation, which allows an additional first-year depreciation deduction. In general, this provision extends the additional first-year depreciation deduction through 2019, effective for property acquired and placed in service after December 31, 2014. The bonus depreciation percentage is now 50 percent, applicable to property placed in service after December 31, 2014, and is reduced by 10 percent per calendar year beginning in 2018. This provision also extends the election to increase the alternative minimum tax credit limitation in lieu of bonus depreciation for five years.
  3. Charitable contribution reduces shareholder’s stock basis by pro rata share of contributed property’s basis permanently, §1367: This provision is beneficial because it limits the stock basis reduction. If an S corporation contributes money or property to a charitable organization, the charitable contribution flows through the S corporation to the S corporation shareholders. The S corporation shareholder must adjust his, her, or its stock basis accordingly. This provision makes permanent that the amount of a stock basis reduction arising from a charitable contribution is equal to the shareholder’s pro rata share of the adjusted basis of the contributed property. The provision applies to charitable contributions made in taxable years beginning after December 31, 2014.