What Are the Tax Provisions of P.L. 114-113?

In late 2015, Public Law 114-113, which includes the Protecting Americans from Tax Hikes (PATH) Act, was signed into law. For years, individuals and businesses operated under a cloud of uncertainty, relying on temporary tax provisions that Congress would often extend retroactively late in the year. This cycle made long-term financial planning difficult. The PATH Act provided stability by making many of these popular tax breaks, known as “extenders,” a permanent part of the tax code. The law’s focus was not on a radical overhaul of tax policy, but on solidifying existing provisions to foster a more stable economic environment.

Permanent Tax Provisions for Businesses

The PATH Act permanently established enhanced expensing rules under Internal Revenue Code Section 179, which were later expanded by the Tax Cuts and Jobs Act of 2017 (TCJA). Section 179 allows businesses to deduct the full purchase price of qualifying equipment and software in the year it is placed in service. For 2025, the maximum amount a business can expense is $1,250,000. The deduction begins to phase out on a dollar-for-dollar basis for businesses that place more than $3,130,000 of property into service during the tax year, and both limits are indexed for inflation.

The PATH Act also permanently allowed taxpayers to expense qualified real property, which includes certain improvements to leaseholds, restaurants, and retail spaces. This change removed a previous, much lower deduction cap that had applied to this type of property. This expansion offered a benefit to businesses in the service and retail sectors looking to invest in their physical locations.

The Research and Development (R&D) tax credit was also made permanent by the PATH Act, providing businesses with more certainty for planning. However, a separate provision that took effect in 2022 requires businesses to amortize their research expenditures over five years for domestic research and 15 years for foreign research. The act also introduced two modifications to make the credit more accessible to smaller companies.

AMT Liability Offset

Eligible small businesses can claim the R&D credit against their Alternative Minimum Tax (AMT) liability. This benefits profitable pass-through entities and their owners who found the credit’s value reduced by the AMT. To qualify for this offset, a business must not be publicly traded and must have average annual gross receipts of less than $50 million for the prior three years.

Payroll Tax Offset

The act enabled certain small startup businesses to use the R&D credit to offset the employer’s portion of FICA payroll taxes. This provision is aimed at new companies that may not yet have any income tax liability to offset. To be eligible, a business must have less than $5 million in gross receipts and have had no gross receipts for any tax year preceding the five-year period ending with the current tax year. A qualifying business can claim up to $250,000 per year against its payroll tax liability, providing a direct cash flow benefit.

The PATH Act also addressed cost recovery for certain real property improvements. Subsequent legislation consolidated these into a single class called Qualified Improvement Property (QIP). Following a legislative correction, QIP is now assigned a 15-year recovery period, a significant improvement over the standard 39-year period for commercial buildings, which also makes these improvements eligible for bonus depreciation.

Permanent Tax Provisions for Individuals

The enhanced American Opportunity Tax Credit (AOTC), a credit for post-secondary education expenses, was made permanent. The law locked in the maximum credit at $2,500 per eligible student for the first four years of higher education. A portion of the credit, up to $1,000, is refundable, meaning taxpayers can receive it even if they have no tax liability.

The act made permanent key improvements to the Child Tax Credit (CTC). However, these rules were temporarily modified by the Tax Cuts and Jobs Act for tax years 2018 through 2025. Under these temporary rules, the credit increased to $2,000 per child, income phase-out levels were raised, and the earned income threshold to claim the refundable portion was lowered to $2,500. These TCJA provisions are scheduled to expire after 2025.

Enhancements to the Earned Income Tax Credit (EITC) were also made permanent, providing relief to larger families and addressing the marriage penalty. The act solidified the increased credit percentage for families with three or more qualifying children and a higher income phase-out threshold for married couples. A later change to the inflation measure used for indexing causes the value of the EITC to increase more slowly over time.

The act permanently gives taxpayers who itemize the option to deduct state and local general sales taxes instead of state and local income taxes. This choice is valuable for residents of states without an income tax. For tax years 2018 through 2025, the total deduction for all state and local taxes is capped at $10,000 per household per year, and this cap is scheduled to expire after 2025.

A provision allowing individuals aged 70½ and older to make tax-free distributions from their Individual Retirement Arrangements (IRAs) to qualified charities was made permanent. This Qualified Charitable Distribution (QCD) is excluded from the taxpayer’s gross income and counts toward their required minimum distribution. The annual limit is indexed for inflation and is $108,000 for 2025.

Significant Temporary Extensions and Sector-Specific Changes

The PATH Act extended bonus depreciation, but subsequent legislation significantly altered the provision. The Tax Cuts and Jobs Act of 2017 allowed businesses to immediately deduct 100% of the cost of most new and used equipment. That incentive is now phasing down. The bonus depreciation rate is 40% for property placed in service in 2025 and is scheduled to drop to 20% in 2026 before being eliminated, unless Congress acts to extend it.

The act made changes to the Foreign Investment in Real Property Tax Act (FIRPTA) of 1980, a law that taxes foreign persons on sales of U.S. real property interests. The changes were designed to ease these rules and encourage foreign investment, particularly through Real Estate Investment Trusts (REITs). The law increased the ownership stake a foreign investor can hold in a publicly traded U.S. REIT from 5% to 10% before triggering FIRPTA withholding.

A new exemption from FIRPTA was also created for qualified foreign pension funds. This provision allows these entities to invest in U.S. real estate without being subject to FIRPTA tax upon the sale of the property. The change provides them with treatment similar to that of U.S. pension funds, removing a barrier to investment in the U.S. real estate market.

The act also delayed two taxes related to the Affordable Care Act: the “Cadillac tax” on high-cost health plans and the medical device excise tax. Both of these taxes were later fully repealed in 2019.

Tax Administration and Compliance Modifications

The PATH Act accelerated filing deadlines for certain information returns to help the IRS combat refund fraud. To clarify reporting for nonemployee compensation, the IRS reintroduced Form 1099-NEC. The law created a new, earlier due date for employers to file Form W-2 and for payers to file Form 1099-NEC.

Under the new rule, these forms must be filed with the government by January 31 of the year following the tax year, the same date that copies are due to recipients. Previously, payers had until the end of February if filing on paper or the end of March if filing electronically. This change gives the IRS the data it needs to verify income reported on tax returns much earlier in the filing season.

The act reformed the Individual Taxpayer Identification Number (ITIN) program. ITINs are issued by the IRS to individuals who need to file federal taxes but are not eligible for a Social Security Number. The law established that any ITIN not used on a federal tax return for three consecutive tax years will automatically expire, which helps remove unused numbers from the system.

The PATH Act also required a staggered renewal process for all ITINs issued before 2013. Taxpayers with these older ITINs were required to renew them over several years. Failure to renew an expiring ITIN can result in delays in processing tax returns and the denial of certain tax credits.

The law expanded due diligence requirements for paid tax return preparers. Previously, preparers were subject to specific documentation requirements and penalties under Internal Revenue Code Section 6695 only when determining a client’s eligibility for the Earned Income Tax Credit. The PATH Act extended these same due diligence standards to cover the Child Tax Credit and the American Opportunity Tax Credit, requiring preparers to exercise the same level of care for all three refundable credits.