Now that Congress has enacted the Protecting Americans from Tax Hikes (PATH) Act of 2016, small businesses can finally have some measure of certainty about tax rules for the foreseeable future. The new PATH Act law impacts taxes for 2015, as well as for 2016 and for more years to come.
Taxes for 2015
The favorable tax rules that had expired at the end of 2014 now apply to 2015. This means you can write off the cost of equipment you bought and placed in service in 2015 up to $500,000 if eligible. If you bought a new vehicle in 2015, you can take an additional $8,000 depreciation allowance due to the extension of bonus depreciation.
After years of expirations of tax rules followed by their extensions, many rules are now permanent. These include:
- $500,000 first-year expensing (Sec. 179 deduction), which is indexed for inflation starting in 2016.
- Research credit. A new rule allows small businesses to use the credit as an offset to their Social Security taxes rather than their income taxes (these businesses may lack the profits that would benefit from a tax credit offset).
- 15-year recovery period for leasehold, restaurant, and retail improvements.
- Wage differential payments for employees on active duty.
- Reduction in S corporation period for built-in gains.
- Parity between free parking and mass transit passes. These tax-free benefits are not subject to income and employment taxes, saving taxes for both employees and employers.
- Charitable contribution deduction for food inventory donations.
- Basis adjustment for S corporation shareholders for donations of appreciated property by their companies.
Not all of the expired rules have become permanent. However, many of the temporary extensions are for more than just a year, as had occurred previously. This allows for better planning for coming years. Examples of temporary extensions:
- Work opportunity credit through 2019. Also, beginning in 2016, there is a new category of targeted workers: long-term unemployed individuals (unemployed for 27 weeks or more).
- Bonus depreciation through 2019. The rate is 50 percent for 2015, 2016, and 2017. The rate for 2018 is 40 percent, and the rate for 2019 is 30 percent.
Extensions for 2016 only include:
- Deduction for energy-efficient commercial buildings.
- Expensing of the first $15 million of certain film and television costs.
- Empowerment zone incentives.
- Credit for manufacturers of energy-efficient homes.
- Indian employment tax credit and accelerated depreciation for business property on an Indian Reservation.
- Classification of race horses as three-year property.
- 7-year recovery period for motorsports entertainment complexes.
- Various energy-related tax credits.
PATH Act: New Rules
What would a tax bill be without new rules. Here is a sampling:
- Safe harbor for de minimis errors on information returns. If the error on an information return is $100 or less ($25 or less in the case of an error involving tax withholding), the issuer does not have to file a corrected return. This change applies for returns and statements required to be filed after December 31, 2016 (i.e., in 2017).
- Change in the due date for information returns and statements relating to employee wage information and nonemployee compensation. All of the returns and statements are due on or before January 31 of the year following the calendar year to which the returns and statements related, so copies of W-2s and 1099s are due to the Social Security Administration and the IRS, respectively, by this date.
The permanency of many favorable tax rules may be illusive because Congress wants to enact comprehensive tax reform in 2016. During this process, some or even many of the so-called permanent provisions may be eliminated or changed.
Nonetheless, the changes now in place with the PATH Act could translate into greater tax savings for your business. The best strategy is to meet with your tax advisor and explore which ones are beneficial to your business.
Also, consider the numerous tax changes for individuals that may also be helpful for your personal income taxes.
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