Just before the turn of the new year, Congress passed a sweeping tax law entitled Protecting Americans from Tax Hikes Act of 2015 (PATH Act). The sheer volume of new provisions is somewhat daunting, and so this article is tailored for the business owner, giving a quick tutorial on the excerpts from PATH that could greatly impact a business owner’s tax planning.
First, the Low-Hanging Fruit: Section 179 Deduction and Bonus Depreciation
I cannot underscore these two highlights enough. For years, the temporary nature of these two provisions have frustrated year end planning opportunities for business owners and accountants alike. But, with the passage of PATH:
Section 179: Business owners can now enjoy the permanent, elevated, immediate deduction of certain tangible personal property purchases (i.e., equipment, etc.) at an amount of up to $500,000 in aggregate per year; the phase-out of such deduction doesn’t begin until total annual costs exceed $2,000,000. And these amounts will be indexed for inflation as well, starting with year 2016. The property purchased can be new or used.
Bonus Depreciation: This one is sort of like Section 179, and so business owners can now enjoy, through 2017, a 50% of cost annual deduction on certain new tangible property (i.e., equipment, etc.). Unlike Section 179, the property must be original use (not used), but there is no annual total limit to the deduction, nor is there a phase-out for aggregate purchases. Just simply deduct 50% of the cost of each piece of personal property. Unlike Section 179, this provision was not made permanent. The deduction limit drops from 50% to 40% in 2018, to 30% in 2019, and then the deduction disappears for 2020 and thereafter (unless of course it gets extended).
Other Key Provisions for Business Owners
The R&D credit: This credit provides incentives for businesses to increase research activities. This credit is now permanent. But what’s more, beginning with year 2016, businesses with less than $50 million in gross receipts will now be able to utilize the credit against Alternative Minimum Tax (AMT). This is extremely beneficial for owners of S corporations and partnerships who have AMT at the personal level. And for startups with less than $5 million in gross receipts, there is opportunity to use the R&D credit against payroll taxes. Read more on R&D tax credits.
Switching from C Corporation to S Corporation status: In many instances, a C corporation can be a really bad choice of tax entity for the business owner. Why? There are many reasons, but probably most prominent is the possibility that the ultimate sale of the business will more likely be an asset sale and not a stock sale. And that means “double tax” on the business sale (possibly over 50% tax). The Built in Gains rules prevent a C Corporation from switching to S Corporation and immediately selling and avoiding the double tax. And so Built In Gains rules calculate the “would be” double tax for 10 years after S election. This 10-year period has been reduced to 5 years with the new PATH act. This new 5-year window should be explored in conjunction with the business owner’s succession plan.
For businesses (especially in any type of food industry), the enhanced and somewhat robust “food donation” to charities has been made permanent. This deduction was already permanent for C corporations, but it now is permanent for non-corporate taxpayers as well.
Charitable giving from IRAs: This one isn’t exactly a business provision, but there are many business owners over age 70-1/2, and so we always get this question of whether donations from IRAs to charity are creditable against the Required Minimum Distribution (RMD). The PATH Act makes permanent the provision whereby an IRA owner over 70-1/2 can, if the money is transferred directly from the IRA to the charity (donor advised funds and supporting organizations do not qualify), exclude from income the transferred amount, up to $100,000 per year. And this amount can count as part of the RMD, so it comes in quite handy for IRA owners who don’t want or need the RMD but only take it due to requirements. If transferred to charity, it’s not a deduction, but it’s better than a deduction, it’s excluded from income, which also may trigger other latent tax benefits which are tied to one’s Adjusted Gross Income.
There are a myriad of other key provisions for all types of taxpayers in the PATH Act, but beyond the scope of this article. If you should ever wish to discuss the key planning opportunities with regard to the PATH Act, contact me at Apple Growth Partners anytime at 330.867.7350.