What Was the American Taxpayer Relief Act of 2015?

The significant tax legislation of 2015 was the “Protecting Americans from Tax Hikes Act of 2015,” or PATH Act, not the similarly named American Taxpayer Relief Act of 2012. The PATH Act addressed the recurring issue of temporary tax provisions, known as “tax extenders,” which required frequent congressional extensions. The act’s primary purpose was to make more than 20 of these tax relief provisions permanent, providing stability for individuals and businesses. The law affected family tax credits, education benefits, business incentives, and Internal Revenue Service (IRS) rules.

Permanent Tax Relief for Individuals

The PATH Act of 2015 made several widely used tax benefits for individuals and families permanent. This ended the annual uncertainty surrounding key deductions and credits.

State and Local Sales Tax Deduction

The PATH Act permanently allows itemizing taxpayers to deduct either state and local income taxes or general sales taxes. This choice benefits residents in states without an income tax. However, a subsequent law capped the total deduction for all state and local taxes at $10,000 per household annually. To claim the sales tax deduction, individuals can total their receipts or use the optional sales tax tables from the IRS.

American Opportunity Tax Credit

The PATH Act made the American Opportunity Tax Credit (AOTC) permanent, providing a credit of up to $2,500 per student for the first four years of higher education. The credit equals 100% of the first $2,000 in expenses and 25% of the next $2,000. Up to 40% of the AOTC is refundable, allowing a refund of up to $1,000 even if no tax is owed. To claim the credit, taxpayers must report the school’s Employer Identification Number (EIN) on their return.

Enhanced Child Tax Credit and Earned Income Tax Credit

Subsequent legislation has altered the Child Tax Credit (CTC). Through 2025, the CTC is $2,000 per child, with a maximum refundable amount of $1,700. The PATH Act did make permanent key enhancements to the Earned Income Tax Credit (EITC). These changes included an increased credit for families with three or more children and a higher income phase-out for married couples filing jointly.

Above-the-Line Educator Expense Deduction

The PATH Act permanently established the above-the-line deduction for eligible K-12 educators who purchase classroom materials. This allows educators to claim the deduction without itemizing. The act indexed the $250 limit for inflation, raising it to $300, and expanded qualified expenses to include professional development courses.

IRA Charitable Rollover

The PATH Act made permanent the qualified charitable distribution (QCD), allowing individuals age 70½ and older to transfer funds directly from a traditional IRA to a charity. This distribution is not counted as taxable income and the annual limit is $108,000 for 2025.

A QCD can satisfy a taxpayer’s required minimum distribution (RMD) for the year. By excluding the distribution from adjusted gross income (AGI), the QCD can help lower income-based Medicare premiums and the taxable portion of Social Security benefits.

Key Business Tax Provisions

The PATH Act also made several business tax incentives permanent. These provisions were designed to encourage investment and support company growth.

Section 179 Expensing

The PATH Act made enhanced Section 179 expensing permanent, allowing a business to deduct the full price of qualifying equipment in the year of purchase instead of depreciating it. For 2025, the maximum deduction is $1,250,000. This deduction phases out once total investment in qualifying property exceeds $3,130,000. Both limits are indexed for inflation.

Research and Development (R&D) Tax Credit

The PATH Act made the Research and Development (R&D) tax credit permanent and expanded its use for small businesses. Eligible small businesses can now use the credit to offset their Alternative Minimum Tax (AMT) liability or a portion of the employer’s share of payroll taxes. However, for tax years after 2021, the underlying R&D expenses must be capitalized and amortized over five years for domestic research or 15 years for foreign research.

Bonus Depreciation

The PATH Act’s bonus depreciation rules were superseded by later legislation. This benefit is now phasing down. The bonus depreciation rate is 40% for property placed in service in 2025 and 20% for 2026, after which it is scheduled to be eliminated.

15-Year Depreciation for Qualified Improvements

The act made permanent a 15-year cost recovery period for Qualified Improvement Property (QIP), which includes certain improvements to leasehold, restaurant, and retail property. Without this provision, these improvements would be depreciated over 39 years. This shorter schedule improves cash flow, and QIP is also eligible for bonus depreciation.

IRS Administration and Taxpayer Protections

The PATH Act implemented reforms to improve tax administration and taxpayer rights. The measures focused on information security, fraud prevention, and IRS accountability.

Codifying the Taxpayer Bill of Rights

The PATH Act formally codified the Taxpayer Bill of Rights into the Internal Revenue Code, giving these ten principles the force of law. The IRS is now legally obligated to uphold them. The rights are:

• The right to be informed
• The right to quality service
• The right to pay no more than the correct amount of tax
• The right to challenge the IRS’s position and be heard
• The right to appeal an IRS decision in an independent forum
• The right to finality
• The right to privacy
• The right to confidentiality
• The right to retain representation
• The right to a fair and just tax system

Measures to Combat Tax Fraud

The PATH Act introduced several tools to combat tax fraud. It accelerated the employer filing deadline for Form W-2, allowing the IRS to verify wages earlier in the tax season. The law also delays refunds for returns claiming the EITC or Additional Child Tax Credit until at least February 15. Additionally, it expanded rules that can bar taxpayers from claiming the EITC, CTC, and AOTC for several years if a claim is found to be fraudulent.

Rules for IRS Employees

The PATH Act prohibits IRS employees from using personal email accounts for official government business. This rule was a response to data security concerns and the risk of disclosing confidential taxpayer information.

Certified Professional Employer Organizations

The act created a voluntary IRS certification program for Professional Employer Organizations (CPEOs), which handle payroll and HR functions for businesses. A certified CPEO provides assurance that it is meeting its tax obligations. When a business pays a certified CPEO for wages, the business is relieved of the corresponding federal payroll tax liability, reducing its risk.

Other Notable Act Components

The PATH Act also contained targeted provisions, such as tightening the rules for Real Estate Investment Trusts (REITs) to prevent certain tax-avoidance strategies. The new rules generally prevent a company spun off from a public corporation from electing REIT status for ten years. This ensures REITs are used for broad-based real estate investment.

S Corporation Provisions

The act permanently changed the built-in gains recognition period for S corporations. When a C corporation converts to an S corporation, it faces a tax on assets that appreciated in value while it was a C corp. The act permanently reduced the holding period to avoid this tax from ten to five years. This gives business owners who convert their corporate structure greater flexibility.

Delay of the “Cadillac Tax”

The PATH Act delayed the “Cadillac Tax,” a 40% excise tax on high-cost employer health plans that was part of the Affordable Care Act. The tax was later fully repealed in 2019 and never went into effect.