by Jonathan Goudy / Tax Planning
Last submission we focused on the Tax Extenders enacted with the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”) benefiting individual taxpayers. Today we focus on Tax Extenders affecting businesses. PATH passage was a great relief to many small businesses that heavily rely on these tax breaks.
PERMANENT EXTENSIONS FOR BUSINESSES
- Code §179 Expensing Deduction
- Pre-PATH, the maximum §179 deduction for expensing fixed asset purchases beginning in 2015 was only $25,000, phasing out dollar-for-dollar to the extent that total qualifying fixed asset purchases for the year exceeded $200,000. No §179 deduction was allowable for real estate improvements and the 50% first-year bonus depreciation deduction for fixed assets ended after 2014.
- PATH restored the $500,000 maximum §179 deduction with a $2 million phase-out threshold, as well as the §179 deduction for computer software and for qualifying real estate improvements, indexing for inflation starting in 2016. The 50% first-year bonus depreciation deduction is in place until 2017, decreasing to 40% in 2018 and 30% in 2019.
- Companies are permanently allowed to use 15-year straight line cost recovery for qualified leasehold, restaurant buildings and retail improvements.
- The §179 deduction cannot exceed the taxpayer’s business taxable income calculated before the deduction and special limitations apply to partnership and S corporation businesses and owners.
- R & D Credit
- The R & D tax credit is available to taxpayers with specified increases in business-related qualified research expenditures and payments to universities and other qualified organizations for basic research.
- The R & D credit equals the sum of
- 20% of any excess of qualified research expenses for the tax year over a base amount,
- The university basic research credit, which is generally 20% of the basic research payments, and
- 20% of the taxpayer’s expenditures on qualified energy research undertaken by an energy research consortium.
- In addition, beginning in 2016, eligible small businesses with $50 million or less of gross receipts may claim the R & D credit against their alternative minimum tax (“AMT”) liability and small start-up businesses with less than $5 million of gross receipts may claim up to $250,000 per year of the credit against their employer FICA tax liability. This can be a huge help to a start-up business.
- Many research investments require years to realize potential, so making this credit permanent, rather than annually renewable, is a great benefit to business and society.
- Reduction in S Corporation Recognition Period for Built-in Gains Tax
- An S corporation is not subject to a separate tax on its operations, like a C corporation, but instead passes through its income to its shareholders, who pay the tax pro-rata on their shares of the S corp.’s income.
- When a C corp. elects to become an S corp. (or when an S corp. receives property from a C corp. in a nontaxable carryover basis transfer (spinoff)), the S corp. is taxed at the highest corporate tax rate on all built-in gains from C corp. operations pre-conversion, if assets are sold and gain is recognized during a “recognition period.”
- PATH made permanent the five-year recognition period that has been in place temporarily since 2012, replacing the historic ten-year period, starting on the first day of the first tax year for which the corporation was an S corp. or acquired property from a C corp.
- Any gain or loss on a disposition of property by an S corp. more than five years after the first day of the recognition period will not be taken into account in determining the net recognized built-in gain. Knowing that the waiting period to avoid the tax on built-in gains is permanently five years, rather than ten, is an obvious benefit.
- 100-Percent Exclusion of Gain on Small Business Stock
- Non-corporate sellers of Qualified Small Business Corporation stock held for more than five years can exclude any gain realized from such sale or exchange, without including any of this excluded gain in alternative minimum tax calculations.
- This is a valuable method of funding certain startups. It requires a five year holding commitment, but trading such stock for a similar stock can allow gain recognition to be further deferred.
- Other Permanent Breaks
- Basis adjustments to S corps. making charitable contributions of property.
- Employer wage credit for employees who are active duty military.
- Enhanced charitable deduction for corporate contributions of food inventory.
TEMPORARY EXTENSIONS FOR BUSINESSES
- First Year Bonus Depreciation (discussed above)
- Expanded Work Opportunity Credit
- Allows employers who hire members of certain targeted groups to get a credit against income tax of 40% of $6,000 in first year wages. This increases if the employee is a long-term family assistance recipient, up to an additional 50% of second year wages.
- The maximum wages to which the credit can be applied for hiring a veteran increase from $6,000 to $12,000, $14,000 or $24,000, depending on factors such as service-related disability, and the period of unemployment before being hired, and when the unemployment occurred.
- This credit has been extended until 2019.
- Business Provisions Extended Through 2016
- Various energy-efficiency tax credits, including wind, solar and energy-efficient commercial buildings.
- Empowerment Zone tax breaks for certain economically depressed areas.
- Employment credit for certain Indian tribe members.
- Railroad track maintenance credit.
- Election to expense mine safety equipment.
This discussion is a summary of PATH’s provisions that provide meaningful relief to taxpayers seeking to plan business operations in tax-efficient manners. Both individuals and businesses are relieved of waiting until December 2016 to see which of these various benefits will be continued. It is a rare pleasure to discuss such positive tax legislation with you.
Remember, it’s not what you make that matters…it’s what you keep!
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties. Please seek advice from an independent tax advisor before acting on any information presented.