The Protecting Americans Against Tax Hikes (PATH) Act of 2015 created and enhanced major sections of the tax code regularly spotlighted by growing business owners. Here, we will take a closer look at the most popular items in the PATH Act.
1. Section 179 Expensing Election
Sec. 179 of the Internal Revenue Code (IRC) allows businesses to elect to immediately deduct (or expense) the cost of certain tangible personal property acquired and placed in service during the tax year, instead of recovering the costs more slowly through depreciation deductions. It is important to understand that the new change can only offset net income and cannot reduce below $0 to create a net operating loss.
What will it look like this year?
Effective January 1, 2018, businesses can immediately deduct up to $1 million for qualifying purchases of capital, with a limit of $2.5 million. After 2018, the limits are indexed to inflation. Businesses can now also take this deduction for nonresidential real property (buildings), including:
- roofs
- fire, alarm and security systems, and
- HVAC (heating, ventilation, and air conditioning) systems.
What types of business property does it apply to?
The IRS has two general requirements:
1. The property (called “qualified property”) must be “tangible, depreciable, personal property which is acquired for use in the active conduct of a trade or business.” Vehicles, (starting in 2018) land, and buildings are included.
2. The property must be purchased and put into service in the year in which you claim the deduction. Putting an asset into service means that you have it set up and working and you are using it in your business. Buying a piece of property and then letting it sit and gather dust doesn’t count.
What else?
Popular qualified compnents of businesses that are now part of the permanent law include: off-the-shelf computer software, and air conditioning and heating units.
If your business is eligible for full Sec. 179 expensing, you might obtain a greater benefit from it than from bonus depreciation (discussed below) because the expensing provision can allow you to deduct 100% of an asset acquisition’s cost. Moreover, you can use Sec. 179 expensing for both new and used property.
2. Accelerated Depreciation of Certain Qualified Real Property
The PATH Act permanently extended the 15-year straight-line cost recovery period for qualified leasehold improvements, qualified restaurant property, and qualified retail-improvement property. The provision exempts these expenditures from the normal 39-year depreciation period.
This is especially welcome news for restaurants and retailers, which typically remodel every five to seven years. If eligible, they may first apply Sec. 179 expensing and then enjoy this accelerated depreciation on qualified expenses in excess of the applicable Sec. 179 limit.
3. The R&D Credit
The Research and Development (R&D) credit provides a lucrative tax savings opportunity for businesses that develop or improve upon their investments in product, processes, formulas, inventions, techniques, and software.
The PATH Act permanently extended the credit. and brought two major enhancements to growing businesses:
- Businesses with $50 million or less in gross receipts can claim the credit against alternative minimum tax (AMT) liability.
- Eligible Startups (those with less than $5 million in gross receipts and less than 5 years old) can use the credit against their payroll tax.
While the credit can a time consuming at first, the tax savings can prove extremely significant.
4. Work Opportunity Credit
The Work Opportunity credit for employers has been extended through 2019.
The WOTC sets for the a plan for businesses to benefit from hires in a “Target group” The amount of the tax credit depends on three factors:
- The target group of the individual hired
- The wages paid to that individual
- and the number of hours that individual worked during the first year of employment
The maximum tax credit that can be earned for each member of a target group is generally $2,400 per adult employee. The credit can be as high as $9,600 per qualified veteran. The good news is that employers aren’t subject to a limit on the number of eligible individuals they can hire.
The tricky part
Its important to know that you must obtain certification that an employee is a member of a target group from the appropriate State Workforce Agency before you can claim the credit. The certification must be requested within 28 days after the employee begins work. This is a strict deadline.
5. S Corporation Recognition Period for Built-In Gains Tax
S corporation income generally is passed through to its shareholders, who pay tax on their proportionate or “pro-rata” shares. If a C corporation elects to become an S corporation in a tax year, the newly created S corporation is taxed at the highest corporate rate (currently 35% for TY 2017–going to 25% TY 2018) on all gains that were built-in at the time of the election and recognized during the “recognition period.”
Under the PATH Act, the period has been cut in half by ten year to only five years, beginning on the first day of the first tax year for which the corporation was an S corporation.
Next Steps
The PATH Act’s temporary and permanent extensions of an assortment of favorable tax breaks for businesses provide significant tax planning opportunities for your business. Because this list is non-exhaustive, the new law may include other extensions and enhancements that can benefit your business. Please forward this to your trusted CPA as they can help you identify the ones that will minimize your taxes and create the most strategic plan. As always, we are here for the R&D component, so be sure to reach out to our tax team to discuss your opportunities before filing!