The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) makes many popular business tax breaks permanent and extends others through 2016 or 2019. Signed into law on December 18, the PATH Act also enhances certain breaks and puts a moratorium on some of the Affordable Care Act’s (ACA’s) controversial taxes.
Several provisions in particular may produce significant tax savings for businesses in 2015 and beyond. We’ll look at each of them and how they’ve been modified.
Section 179 Expensing Election
Section 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. However, the election can offset only net taxable income, and it can’t reduce income below $0 to create a net operating loss.
The election is subject to annual dollar limits. For 2014, businesses could expense up to $500,000 in qualified new or used assets, subject to a dollar-for-dollar phaseout once the cost of all qualifying property placed in service during the tax year exceeded $2 million. Without the PATH Act, the expensing limit and the phaseout amounts for 2015 would have sunk to $25,000 and $200,000, respectively.
The new law:
- Makes the 2014 expensing limits permanent, indexing them for inflation beginning in 2016.
- Makes permanent the ability to apply Section 179 expensing to qualified real property, reviving the 2014 limit of $250,000 on such property for 2015 but raising it to the full Section 179 limit beginning in 2016.
- Expands the list of qualified real property from qualified leasehold-, restaurant-, and retail-improvement property to permanently include off-the-shelf computer software and, beginning in 2016, air conditioning and heating units.
If your business is eligible for full Section 179 expensing, it may provide a greater benefit than bonus depreciation (see below), because the expensing provision can allow you to deduct 100 percent of an asset acquisition’s cost. Moreover, you can use Section 179 expensing for both new and used property.
The news is mixed on bonus depreciation, which allows businesses to recover the costs of depreciable property more quickly by claiming bonus first-year depreciation for qualified assets. The provision was extended, but only through 2019 and with declining benefits in the later years. For property placed in service during 2015, 2016, and 2017, the bonus depreciation percentage is 50 percent. It drops to 40 percent for 2018 and 30 percent for 2019.
The provision continues to allow businesses to claim unused alternative minimum tax (AMT) credits in lieu of bonus depreciation. Beginning in 2016, the amount of unused AMT credits businesses may claim increases.
Qualified assets include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property, and qualified leasehold-improvement property. Beginning in 2016, qualified improvement property doesn’t have to be leased to be eligible for bonus depreciation.
Note that if you qualify for Section 179 expensing, it may provide a greater tax benefit than bonus depreciation. But bonus depreciation is available to a broader set of taxpayers, because it isn’t subject to any asset purchase limit or net income requirement.
Accelerated Depreciation of Certain Qualified Real Property
The PATH Act permanently extends the 15-year, straight-line cost recovery period for qualified leasehold improvements (alterations in a building to suit the needs of a particular tenant), qualified restaurant property, and qualified retail-improvement property. The provision exempts these expenditures from the normal 39-year depreciation period.
R&D Tax Credit
The PATH Act permanently extends the R&D tax credit, which provides an incentive for businesses to increase their investments in research. Businesses have long complained that the annual threat of extinction to the credit deterred them from pursuing critical research into new products and technologies.
In addition to the permanent extension, beginning in 2016, businesses with $50 million or less in gross receipts can claim the credit against AMT liability, and certain start-ups (generally those with less than $5 million in gross receipts) that haven’t yet incurred any income tax liability can use the credit against their payroll tax.
While the credit is complicated to compute, the tax savings can be significant. See our earlier Alert on the R&D tax credit extension for more on claiming the credit.
Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC)—for employers that hire members of certain target groups—has been extended through 2019. The PATH Act also expands the credit beginning in 2016 to apply to employers that hire qualified individuals who have been unemployed for 27 weeks or more. See our earlier Alert on the WOTC extension for more on these target groups and how you can claim the credit.
The amount of the tax credit depends on 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 earned for each member of a target group is generally $2,400 per adult employee, but the credit can be as high as $9,600 per qualified veteran. Employers aren’t subject to a limit on the number of eligible individuals they can hire. In other words, if 10 individuals qualify, the credit can be 10 times the amount listed.
Bear in mind 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. This certification must be requested within 28 days after the employee begins work. For 2015, the IRS may extend the deadline as it did for 2014. In that year, legislation reviving the Work Opportunity Tax Credit for that year also wasn’t passed until late in the year—meaning the 28-day period had already expired for many of the covered employees hired in 2014.
Donations of Food Inventory
The PATH Act makes permanent the enhanced deduction for contributions of food inventory for noncorporate business taxpayers. Under the enhanced deduction, which is already permanently available to C corporations, the lesser of basis plus one-half of the item’s appreciation or two times basis can be deducted, rather than only the lesser of basis or fair market value.
Beginning in 2016, the limit on deductible contributions of such inventory increases from 10 percent to 15 percent of the business’s adjusted gross income per year (or 15 percent of taxable income in the case of a C corporation).
S Corporation Recognition Period for Built-In Gains Tax
S corporation income generally is passed through to shareholders, who pay tax on their pro-rata shares. If a C corporation elects to become an S corporation, the newly created S corporation is taxed at the highest corporate rate (currently 35 percent) on all gains that were built in at the time of the election and recognized during the recognition period.
Generally, the recognition period is 10 years, but under the PATH Act, it’s only five years, beginning on the first day of the first tax year for which the corporation was an S corporation.
Transit Benefit Parity
The PATH Act makes permanent the provision that established equal limits for the amounts that can be excluded from an employee’s wages for income and payroll tax purposes for parking fringe benefits and vanpooling and mass transit benefits. The limits for both types of benefits are now $250 per month for 2015. Without the extension of parity, the limit for van-pooling or mass transit would be only $130.
The new tax legislation has also gained attention for delaying some divisive provisions in the ACA. For example, it puts off the start of the so-called Cadillac tax on high-cost, employer-provided health insurance from 2018 to 2020. The 40 percent tax would be applied to health coverage that costs more than $10,200 for individuals or $27,500 for families, with annual threshold increases based on inflation. The tax would be assessed on the difference between the total cost of health benefits for an employee in a year and the applicable threshold amount.
Additionally, the PATH Act halts the 2.3 percent excise tax on the sale of medical devices in 2016 and 2017.
The PATH Act’s temporary and permanent extensions of valuable business tax breaks provide significant tax planning opportunities. We’ve touched on only some of the most popular here, but the new law includes other extensions and enhancements that may benefit your business as well. Contact your Moss Adams professional to help you identify opportunities to reduce your liability for 2015 and future years.