As has been the case the past few years, Congress decided to wait until late in the year to extend a series of temporary tax provisions that have fairly significant implications for individual taxpayers and businesses. However, the PATH Act (Protecting Americans from Tax Hikes Act of 2015), passed by Congress and signed into law by the President on December 18, 2015, did take a new approach. Instead of extending the same package of provisions for merely a year or two, the new law made approximately 20 of the provisions permanent and extended the remaining provisions for either two or five years. Several of the tax provisions were also significantly changed under the PATH Act. In our last article, we looked at a number of the individual provisions that were updated with the new act as well as legislation passed earlier, while in this article we will explore provisions related to businesses.
Many of the tax provisions made permanent in the PATH Act related to tax planning provisions that small to medium sized businesses in capital intensive activities have come to rely on year to year, and the new permanent nature of these provisions will assist businesses with their tax planning and budgeting for years to come. In addition, the Affordable Care Act and other bills passed earlier will continue to impact many small to medium sized businesses during the 2015 filing season and beyond.
- Section 179 Expensing: Section 179 expensing limits, including the $500,000 maximum deduction and a $2,000,000 threshold for phasing out of the deduction, are retroactively reinstated for 2015 and made permanent. Special rules allowing expensing deductions for computer software and certain qualified real property are also made permanent. In addition, the new rules index the $500,000 maximum deduction and the $2M phase-out threshold for inflation beginning in 2016. In addition, the 2015 PATH Act repeals a current-law provision that excludes air conditioning and heating units from the definition of qualifying property.
- Bonus Depreciation: The tax provision for 50% bonus depreciation on new equipment are effective for 2015 and extended at that level through 2017. However, unfavorably, in 2018 the bonus depreciation rules will continue but as 40% bonus depreciation, 30% in 2019, and then bonus depreciation will be phased out altogether after 2019. A significant change for farmers is that bonus depreciation is now available for certain fruit and nut trees that have a pre-production period of two years or more in the year of planting.
- Reduction in S-Corporate Built-in Gain Period: The 2015 Path Act makes permanent the five-year recognition period for built-in gains of S-corporations (the previous period was ten years). Under current regulations, this five-year recognition period also would apply to real estate investment trusts and regulated investment companies that do not elect ‘deemed sale’ treatment.
- Section 1202 Small Business Stock Capital Gains Exclusion: The rules to exclude capital gains on qualifying small business stock acquired and held for more than 5 years upon sale has been made permanent. The rules that eliminates such gain as an AMT preference item (allowing the favorable treatment to be preserved even for those subject to the AMT) is also made permanent.
- Research and Development Credit: the credit is extended retroactive to January 1, 2015 and made permanent, with several notable enhancements.the credit is extended retroactive to January 1, 2015 and made permanent, with several notable enhancements.the credit is extended retroactive to January 1, 2015 and made permanent, with several notable enhancements.The R&D credit has been made permanent with a number of significant enhancements. for tax years beginning after 2015, a small business may claim the credit against its alternative minimum tax (AMT) liability. For this purpose, a “small business” is one with less than $5 million of gross receipts. Also, a start-up company may annually claim up to $250,000 of the credit against its FICA tax liabilityFor tax years beginning after 2015, a small business may claim the credit against its alternative minimum tax (AMT) liability (a “small business” is defined as one with less than $5 million of gross receipts). Also, a start-up company may annually claim up to $250,000 of the credit against its FICA tax liability
- Work Opportunity Tax Credit: The work opportunity tax credit has been extended through 2019 for businesses who hire certain targeted groups, including veterans. Under the new legislation individuals who qualify as long-term unemployed (unemployed more than 27 weeks) are considered an eligible group. The credit can be as much as $9,600.
- Applicable Large Employer (ALE) Penalties: Businesses with a seasonally adjusted full-time employee equivalency of over 100 employees may face penalties on their 2015 tax return for failing to provide health insurance or insurance deemed affordable to the employees. This threshold will be reduced to businesses with a seasonally adjusted full-time employee equivalency of 50 or more employees in 2016.
Also, business taxpayers should be aware of new forms they will be required to file for 2015. The Affordable Health Care Act, introduced the new tax forms 1095-B and 1095-C used to report health insurance provided (or not provided) to employees of the business. Only businesses with a seasonally adjusted full-time employee equivalency of 50 or more employees are required to provide these forms. These forms would normally be due to the employees by January 31st, but the IRS recently announced transitional relief to allow businesses in 2016 to provide the 2015 forms to employees by March 31, 2016 instead.
About Alegria & Company, P.S.
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