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Tax savings from another late law.
Once again, lawmakers waited until late in the year to pass another “extenders” bill. The new “Protecting Americans from Tax Hikes (PATH) Act of 2015” retroactively extends quite a few tax-saving provisions, many of them quite narrow in scope such as those for film and theater producers, NASCAR® racetrack owners, racehorse owners and rum producers in Puerto Rico and the Virgin Islands. Fortunately, among the extended provisions are many others that will benefit those in the specialty fabrics industry.
First-year write-offs
The so-called “Section 179” deduction allows a business an up-front expense deduction for the entire cost of equipment ranging from computers to furniture to vehicles and machinery. The amount allowed as a write-off in the first year (instead of slowly deducting or depreciating over several years) is now permanently fixed at $500,000 per year (phased out dollar-for-dollar as expenditures begin to exceed $2 million in a year). In an unusual move, lawmakers will allow these amounts to be permanently adjusted for inflation beginning in 2016.
A bonus write-off
Originally created as a short-term stimulus measure, bonus depreciation is back, although phased out over a five-year period. Bonus depreciation, which permits the immediate deduction of any business equipment expenses, rather than a depreciated tax benefit over time, has been extended at the former 50 percent rate for the 2015–2017 tax years, reduced to 40 percent in 2018 and 30 percent in 2019. Making it even semipermanent allows businesses that spend heavily on equipment, machinery and other business property to reap large up-front tax breaks. Overall tax savings are predicted to be $281 billion over a 10-year period.
Many professionals will find that the bonus depreciation break may be more valuable than the Section 179 deduction, because the Section 179 expensing deduction is limited to the taxable income of the business for the tax year. Although any excess Section 179 write-off can be carried forward, losses generated by the 50 percent bonus depreciation can offset income from other sources. Section 179 losses can also be carried back for two years, thereby generating a refund.
Research expense credit
The much-talked about but often ignored research and experimentation or development (R&D) tax credit has been permanently extended and can now be used to offset the alternative minimum tax liability of an industrial textile products business—or to reduce an employer’s payroll tax liability.
PATH now makes permanent the much-maligned and all-too-often ignored Section 41 credit for increased research expenses—a direct reduction of the operation’s tax bill rather than a deduction that merely reduces the income on which the tax bill is computed—for qualified research expenses. While market research and product testing do not qualify, all research in the laboratory sense or for experimental purposes does.
Energy efficiency
A provision in PATH extends, through the 2016 tax year, the above-the-line deduction for the cost of energy efficient improvements made to what lawmakers call “commercial” buildings. In other words, a business can now get tax deductions for building or renovating a plant, shop or warehouse building that is designed to save 50 percent or more of projected annual energy costs for heating, cooling and lighting compared to model national standards. Partial deductions for efficiency improvements made to individual lighting, HVAC and water heating, or the building’s envelope system are also available.
As the economy improves, many businesses are replacing much of their equipment and other business assets.
The tax deductible amount is up to $1.80 per square foot of the building and the deduction is available to either the owners or tenants (or designers, in the case of government-owned buildings) of new or existing commercial buildings that are constructed or reconstructed to save at least 50 percent of the heating, cooling, ventilation, water heating and interior lighting energy costs.
A partial deduction of $0.60 per square foot can be taken for improvements made to one of three building systems—the building envelope, lighting or heating, or the cooling system. The partial building improvement must reduce total heating, cooling, ventilation, water heating and interior lighting energy use by 16-2/3 percent (16-2/3 percent is the 50 percent goal of the three systems spread equally over the three systems).
Work opportunity tax credit
PATH retroactively extended and greatly expanded the Work Opportunity Tax Credit (WOTC) through the 2019 tax year. The WOTC allows employers who hire members of certain targeted groups to claim a credit against the operation’s tax bill of a percentage of first-year wages up to $6,000 per employee ($3,000 for qualified summer youth employees). In situations where the employee is a long-term family assistance (LTFA) recipient, the WOTC is equal to a percentage of first and second year wages, up to $10,000 per employee.
Beginning with the Forms W-2, W-3, and returns for reporting nonemployee compensation (e.g., Form 1099-MISC) filed for the 2016 tax year as well as those required in later years, PATH will require them to be filed on or before January 31. No longer will those forms be required to be eligible for the extended filing date for electronically filed returns.
Built-in gains of S corporations
As the economy improves, many businesses are replacing much of their equipment and other business assets. While an S corporation is not a taxable entity (losses and profits are passed on to shareholders), many professionals are just discovering a unique corporate-level tax that is being imposed at the highest marginal rate (currently 35 percent) on the so-called “built-in gain” of a business operating as an S corporation. It usually refers to gains that arose prior to the operation’s conversion from a regular C corporation to an S corporation, and arises when assets are sold. PATH retroactively and permanently provides that, for determining the net recognized built-in gain, the recognition period is a five-year period—the same period that applied to tax years beginning in 2014.
In other words, the built-in capital gains of a corporation that has become an S corporation must be held for five years to avoid a conversion capital gains tax. Permanently reducing the S corporation recognition period for the built-in gains tax will make it easier for incorporated businesses to become Subchapter-S corporations and more fluidly change the status of their business to respond to changing market conditions.
It’s good news down the road: the so-called “Cadillac tax” that was supposed to start in 2018 has been postponed once again. That means businesses that offer their employees—or their owners and shareholders—expensive health insurance will not have to pay the Cadillac tax for those plans until 2020.
Which of the provisions of the Protecting Americans from Tax Hikes (PATH) Act of 2015 will best help your business reap its share of the new law’s expected $622 billion in tax savings? Thanks to the complexity of the new law, professional assistance may be required to maximize write-offs for the 2015 tax year as well as in planning to take advantage of all the benefits your business is entitled to in the years ahead.
Mark E. Battersby writes extensively on business, financial and tax-related topics.