Changes to 831(b) and Tax Extensions

President Obama recently signed the Protecting Americans from Tax Hikes (PATH) Act of 2015. PATH includes long-term extensions to provisions that were previously extended on a year-by-year basis. Several of these provisions were permanently extended with some modifications. A few of the highlights include amendments to section 831(b), permanent expensing limitations under section 179, and a 5-year extension of bonus depreciation.

Section 831(b)

PATH modified section 831(b) eligibility rules for certain property and casualty insurance companies to be taxed solely on investment income rather than underwriting income. The maximum amount of written premiums was increased from $1.2 million to $2.2 million and will be indexed for inflation going forward. The provision includes two “diversification requirements,” but only one needs to be met to be eligible for a section 831(b) election. The first requirement states that no more than 20% of the net written premiums (or if greater, direct written premiums) of the company are attributable to any one policyholder. The second requirement deals with ownership of captive insurance companies. This requirement is met if a spouse or lineal descendants’ ownership (directly or indirectly) in a captive is not greater than 2% ownership in the parent company. In essence, spouses and or children cannot own a parent company’s captive, if they do not also own a significant percentage of the parent company for this election. The provision applies to tax years beginning after 2016.

Section 179

PATH permanently extended the increased expensing limitation and phase-out amounts of $500,000 and $2 million under section 179, which have been in effect since 2010.  These amounts will be indexed for inflation after 2015. The rules that allow for expensing of computer software and qualified real property were permanently extended. Certain air conditioning and heating units are now eligible for expensing and the $250,000 cap on qualified real property was eliminated.

Bonus Depreciation

PATH also extended bonus depreciation for property acquired and placed in service during 2015 through 2019. The bonus depreciation remains at 50% until 2017 and will be phased down to 40% in 2018, and 30% in 2019 which will then be eliminated altogether. This amount of unused AMT credits that can be claimed in lieu of bonus depreciation increases beginning in 2016.