Tax planning can be difficult as businesses wait anxiously each year to see if key tax breaks will be reinstated or extended by Congress.
But in December, not only were more than 50 expired tax incentives extended but some of the more popular ones were made permanent, notably the Section 179 deduction, which allows businesses to immediately deduct purchases of some equipment rather than depreciating it over many years.
On Dec. 18 President Barack Obama signed into law the Protecting Americans from Tax Hikes (PATH) Act of 2015, which retroactively extended several key tax breaks that expired at the end of 2014.
“The passage of the PATH Act, which makes Section 179 expensing permanent, is a boost for Long Island’s small businesses, as there will no longer be the uncertainty of renewal from year to year, and thus companies can plan better and invest smarter,” Long Island Association president Kevin Law says.
Change in deduction law. The Section 179 deduction, on purchases of qualifying new or used equipment such as office equipment, business machinery and computers placed in service by year-end, has been permanently capped at $500,000, says Barbara Weltman, a Vero Beach, Florida, small-business tax specialist and author of “J.K. Lasser’s Small Business Taxes 2016” (Wiley; $22.95). The deduction begins to phase out on purchases over $2 million in 2015 ($2,010,000 in 2016). Without the new law, the expensing limit for 2015 would have been capped at $25,000.
Expensing isn’t limited to equipment. It also applies to qualified leasehold, restaurant and retail improvements. For 2015 the deduction for these expenditures is limited to $250,000, but in 2016 the $500,000 limit applies, Weltman says.
For new equipment purchases there’s an additional 50 percent first-year bonus depreciation allowance, meaning you can deduct half the cost of qualified purchases up front, Weltman says. This is generally taken for larger purchases after the Section 179 spending cap is reached. It’s been extended through 2019, although the rate in 2018 drops to 40 percent, and in 2019, to 30 percent.
Other PATH Act benefits. Also important to note is that the PATH Act extended the 15-year recovery period of qualified leasehold, restaurant and retail improvements, says Ken Laks, a tax partner with Albrecht, Viggiano, Zureck & Co. in Hauppauge. This allows a business to deduct the remaining cost of improvements over 15 years instead of 39.
This provision previously was pursuant to the property owner’s having a lease signed when the improvements were made, he notes. That provision has been taken out for the 2016 tax year and beyond.
R&D tax credit. The research and development tax credit is another important provision that was made permanent, says Magda Szabo, a tax partner at Grassi & Co., a Jericho CPA firm.
Szabo says many businesses overlook this credit because it’s commonly equated only with spending on scientific research. But it can apply to investment in other innovation, she says, including software development.
Laks agrees. For example, if you’re a wholesaler in the meatpacking industry and invest in developing your own method to pack and ship your products, you might be eligible for the R&D credit, he says.
Costs that qualify include wages of employees involved in developing new or improved products/procedures and costs incurred for supplies used during the R&D phase, he notes. There are different ways to calculate eligible expenditures; it’s wise to consult a professional.
While these breaks are welcome, particularly the permanent ones, businesses should note “the word permanent in the world of tax means until Congress changes the rules again,” Laks notes.
DID YOU KNOW?
The Work Opportunity Tax Credit, a credit for hiring members of certain targeted groups, now applies to a new group: the long-term unemployed. Beginning this year and through 2019, you can get up to $2,400 back for hiring an individual who has been unemployed for at least 27 weeks.
Source: Barbara Weltman