What Are the Permanent Tax Extenders?

For many years, taxpayers and businesses navigated a landscape of temporary tax provisions, often referred to as “tax extenders.” These were tax deductions, credits, and other breaks that Congress would renew for only a year or two at a time, creating uncertainty. This cycle made long-term financial planning difficult for both individuals and companies.

This persistent uncertainty was largely addressed by the Protecting Americans from Tax Hikes (PATH) Act of 2015. This legislation broke the cycle by making many of these popular but temporary tax provisions permanent fixtures in the U.S. tax code. By doing so, it provided a more stable and predictable framework, allowing taxpayers to make financial decisions with a clearer understanding of long-term tax implications.

Permanent Tax Provisions for Individuals

A provision made permanent by the PATH Act is the option for taxpayers who itemize to deduct state and local general sales taxes instead of state and local income taxes. This choice is particularly beneficial for residents in states that do not impose a state income tax. The total deduction for all state and local taxes is capped at $10,000 per household annually. Taxpayers can save their receipts to deduct the actual amount of sales tax they paid or use the optional sales tax tables provided by the IRS.

The law also permanently established the American Opportunity Tax Credit (AOTC) for higher education expenses. The AOTC provides a credit of up to $2,500 per eligible student for the first four years of post-secondary education. Up to 40% of the credit is refundable, meaning a taxpayer can receive money back even if they owe no income tax.

For educators, the PATH Act made permanent the ability to take an above-the-line deduction for out-of-pocket classroom expenses. This allows eligible K-12 teachers, aides, counselors, and principals who work at least 900 hours in a school year to deduct unreimbursed costs of books, supplies, and other materials used in the classroom. The amount of the deduction is indexed for inflation and is available whether the educator itemizes or takes the standard deduction.

Finally, the law equalized and made permanent the exclusion from income for employer-provided mass transit and parking benefits. This allows employees to receive up to a certain monthly amount from their employer for transit passes, vanpooling, or qualified parking, without that amount being included in their taxable wages. The limits are indexed for inflation annually.

Permanent Tax Provisions for Businesses

One of the business provisions made permanent and later enhanced is the Section 179 expensing deduction. This allows a business to deduct the full purchase price of qualifying new or used equipment and off-the-shelf software in the year it is placed in service, rather than depreciating the cost over several years. The expensing limit and phase-out threshold are now significantly higher and are indexed for inflation.

The Research and Development (R&D) tax credit was also made a permanent part of the tax code, encouraging businesses to invest in innovation within the United States. The credit is calculated based on qualified research spending and can reduce a company’s income tax liability. A modification allows eligible small businesses to claim the credit against their Alternative Minimum Tax (AMT) liability, and certain startup companies can use the R&D credit to offset a portion of their employer payroll tax liability.

A 15-year straight-line cost recovery period is now available for qualified improvement property, which includes many interior, non-structural improvements to commercial buildings. This accelerated depreciation schedule allows businesses that invest in improving their spaces to recover the costs more quickly than the standard 39-year period for commercial property.

The legislation also addressed a concern for S corporations by permanently establishing a reduced five-year recognition period for the built-in gains tax. When a C corporation converts to an S corporation, it can be subject to a corporate-level tax on the appreciation of its assets that occurred before the conversion if those assets are sold within that timeframe. Making the recognition period five years instead of a previous ten reduces the potential tax burden on newly converted S corporations.

Permanent Provisions for Charitable Giving and Energy

A provision for charitable giving that was made permanent allows individuals aged 70½ and older to make tax-free distributions directly from their Individual Retirement Accounts (IRAs) to qualified charitable organizations. This mechanism, known as a Qualified Charitable Distribution (QCD), allows for transfers up to an annual limit that is indexed for inflation. The amount transferred via a QCD is excluded from the taxpayer’s gross income and can simultaneously satisfy their annual Required Minimum Distribution (RMD).

The PATH Act also solidified tax incentives aimed at encouraging energy efficiency. One such provision is the tax deduction for energy-efficient commercial buildings, referred to as Section 179D. This deduction is available to owners or designers of new or existing commercial buildings who install systems that achieve specified reductions in the building’s total energy and power costs.

Implications for Tax Planning

The transition of numerous tax extenders from temporary to permanent status changes the landscape for long-term financial strategy. With the uncertainty of annual renewals removed, individuals and businesses can now engage in multi-year planning with a higher degree of confidence. This stability allows for more proactive and strategic decision-making, rather than reactive compliance based on last-minute legislative changes.

For businesses, the permanence of deductions for capital expenditures and R&D has profound implications for planning. A company can develop a multi-year strategy for acquiring equipment, knowing that the expensing option will be available. Individuals also benefit from this stability. Families planning for higher education costs can now reliably incorporate the American Opportunity Tax Credit into their savings and financing models for college.