Business Year-End Planning
The end of the year is the last chance for business owners to evaluate the current and future status of their operations and the associated tax implications. Businesses must understand the tax law changes that impact their industries, operations and, ultimately, their profitability. A number of tax reform proposals that directly affected businesses were passed in 2015 and 2016; however, progress on further legislation will not likely be finalized until early 2017. Therefore, business owners and their tax advisors must remain vigilant and up-to-date.
Following are the highlights of the Tax Provisions in the Protecting Americans from Tax Hikes (PATH) Act of 2015 and the Consolidated Appropriations Act, 2016, which include some of the tax saving provisions:
Enhanced expensing election is made permanent.
Under Internal Revenue Code Section 179, a taxpayer, other than an estate, or trust, or certain noncorporate lessors, may elect to deduct as an expense, rather than to depreciate, up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in the taxpayer’s trade or business. The maximum annual expensing amount generally is reduced dollar-fordollar by the amount of property placed in service during the tax year in excess of a specified investment ceiling.
The Act makes the following changes to the expensing election:
- The $500,000 expensing limitation and $2 million phase-out amounts are retroactively extended and made permanent.
- For any tax year beginning after December 31, 2015, both the $500,000 and $2 million limits are indexed for inflation.
- The rule that allows expensing for computer software is retroactively extended and made permanent.
- For tax years beginning after December. 31, 2014, an expensing election or specification of property to be expensed may be revoked without IRS’s consent. Thus, the ability to revoke an expense election without IRS consent is made permanent.
- Qualified real property is eligible to be expensed for tax years beginning before 2016. No portion of disallowed pre-2016 tax year qualified real property expensing may be carried to a tax year beginning after December 31, 2015.
- For tax years beginning after December 31, 2015, expensing of qualified real property is made permanent without a carryover limitation, and the $250,000 expensing limitation with respect to qualifying real property is eliminated.
- For tax years beginning after December 31, 2015, air conditioning and heating units are eligible for expensing.
Fifteen-year write-off for qualified leasehold and retail improvements and restaurant property is made permanent.
Effective for property placed in service after December 31, 2014, the Act retroactively extends and makes permanent the inclusion of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property in the 15-year MACRS class.
Bonus first-year depreciation is retroactively extended through 2019.The Act extends bonus depreciation for new qualified property (buyer as the first user) acquired and placed in service during 2015 through 2019 (through 2020 for certain longer-lived and transportation property). Eligible taxpayers will be able to claim:
- 50% bonus depreciation allowance for qualified property placed in service in 2015 through 2017;
- 40% bonus depreciation allowance for qualified property placed in service in 2018; and
- 30% bonus depreciation allowance for qualified property placed in service in 2019.
- After 2015, additional first-year depreciation is allowed for qualified improvement property without regard to whether the improvements are property subject to a lease, and there is no requirement that the improvement must be placed in service more than three years after the date the building was first placed in service.
- For plants planted or grafted after December 31, 2015 and before January 1, 2020, bonus depreciation is allowed for certain trees, vines, and plants bearing fruit or nuts when planted or grafted, rather than when placed in service.
- The special rule for the allocation of bonus depreciation to a long-term contract is extended for five years to property placed in service before January 1, 2020 (January 1, 2021, in the case of certain longer-lived and transportation property).
Research credit is made permanent and creditable against other taxes.The research credit equals the sum of:
- 20% of the excess (if any) of the qualified research expenses for the tax year over a base amount (unless the taxpayer elected an alternative simplified research credit);
- University Basic Research Credit for basic research payments to qualified organizations (i.e., 20% of the basic research payments); and
- 20% of the taxpayer’s expenditures on qualified energy research undertaken by an energy research consortium.
The base amount is a fixed-base percentage of the taxpayer’s average annual gross receipts from a U.S. trade or business, net of returns and allowances, for the four tax years before the credit year, and can’t be less than 50% of the year’s qualified research expenses. The fixed-base percentage for a non-startup company is the percentage (not exceeding 16%) that the taxpayer’s total qualified research expenses represent within total gross receipts for tax years beginning after 1983 and before 1989. A 3% fixedbase percentage applies for each of the first five tax years in which a “startup company” (one with fewer than three tax years with both gross receipts and qualified research expenses) has qualified research expenses.
A taxpayer can elect an alternative simplified research credit equal to 14% of the excess of the qualified research expenses for the tax year over 50% of the average qualified research expenses for the three tax years preceding the tax year for which the credit is being determined. If a taxpayer has no qualified research expenses in any one of the three preceding tax years, the alternative simplified research credit is 6% of the qualified research expenses for the tax year for which the credit is being determined.
Work opportunity tax credit is retroactively extended through 2019 and expanded.
The Work Opportunity Tax Credit (WOTC) allows employers who hire members of certain targeted groups to receive a credit against income tax of a percentage of first-year wages up to $6,000 per employee ($3,000 for qualified summer youth employees). Where the employee is a Long-term Family Assistance (LTFA) recipient, the WOTC is a percentage of first and second-year wages, up to $10,000 per employee. Generally, the percentage of qualifying wages is 40% of first-year wages; the percentage is 25% for employees who have completed at least 120 hours but less than 400 hours of service for the employer. For LTFA recipients, an additional 50% of qualified second-year wages is included.
The maximum WOTC for hiring a qualifying veteran generally is $6,000. However, the credit can be as high as $12,000, $14,000, or $24,000, depending on factors such as whether the veteran has a service-connected disability, the period of his or her unemployment before being hired, and when that period of unemployment occurred relative to the WOTC-eligible hiring date.
The Act retroactively extends the WOTC so that it applies to eligible veterans and non-veterans who begin work for the employer on or before December 31, 2019.
Empowerment zone tax breaks are retroactively extended through 2016.
The designation of an economically depressed census tract as an “Empowerment Zone” renders businesses and individual residents within such a zone eligible for special tax incentives. The Act extends for two years, through December 31, 2016, the period for which the designation of an empowerment zone is in effect.