Washington has adopted a tradition in recent years of allowing certain tax provisions to expire and then renewing them for a short period. This renewal takes place 11 or 12 months after the provisions have actually expired.
In 2015, the tradition continued. On Dec. 18, the president signed into law the Protecting Americans from Tax Hikes of 2015 Act. The PATH Act contains many provisions affecting business and individual taxes. For some taxpayers, the provisions are a literal path to lower taxes.
The PATH legislation extended many tax provisions, made permanent other provisions and enacted some new provisions. Many provisions had expired for years after 2014. So, for most of the 2015 tax year , taxpayers didn’t have certainty on whether certain code sections in the Internal Revenue Code were going to be in effect for the 2015.
I took a few minutes to count all the provisions in the PATH Act and there are more than 100. The Joint Committee on Taxation explanation of the PATH Act is more than 250 pages long.
The good news for many was that certain provisions were permanently added to the tax code. One of the permanent additions is the research and experimentation credit. This credit is based largely on payroll costs expended on research and experimentation activities. As long as I can recall, this provision has been given a short life in the tax code, though many think of it as being permanent.
The general consensus in Washington is that the credit assists in maintaining and expanding high paying research, engineering and technical jobs in the U.S. Many others countries have recently enacted patent box or research tax regimes that offer reduced tax rates to certain research activities. These regimes are typically more lucrative that the U.S. research and experimentation credit. There are proposals in Washington to consider a more focused tax regime for research activities that may place the U.S. on par with the other country regimes.
The research and experimentation credit may be claimed other than as a direct credit against federal corporate income taxes. Small businesses (those businesses with $50M in average gross receipts) are allowed to offset Alternative Minimum Tax liability with research credits starting in 2016.
This is good news, as for many small businesses and their owners, the AMT often limits the ability to claim and realize the economic benefit of research and experimentation tax credits. For small businesses that were not determining their research credit in prior years because the AMT impact didn’t provide any actual cash tax benefit, this provision offers an opportunity to take advantage of the research and experimentation credit and receive a cash benefit.
For certain start-up businesses with less than $5M in gross receipts, there is another method to realize the research and experimentation tax credit. For qualifying start-ups, the research and experimentation credits can offset certain payroll tax liabilities (Social Security and Medicare taxes) up to $250,000, effective for the 2016 tax year.
Other favorable changes affecting businesses include many depreciation provisions. For most tax years since the events of 9/11, there have been favorable depreciation and bonus depreciation provisions available to business taxpayers making capital investment. The favorable depreciation provisions are thought to stimulate economic activity for both the manufacturer of the machinery and equipment eligible for the bonus depreciation and for the business that acquires the new machinery and equipment.
The PATH Act continues the bonus depreciation, which allows for depreciation deduction beyond the amount otherwise allowed. It was extended through 2019. Qualified asset purchases are eligible for bonus depreciation of 50 percent of the new asset cost in 2015-2017, 40 percent in 2018 and 30 percent in 2019. Businesses may want to take into account the scheduled changes and timing of certain fixed asset purchases to take advantage of bonus depreciation benefits. A new classification of property for bonus depreciation includes certain qualified improvement property that includes improvements to an interior of a commercial building (even if the property is not leasehold property).
The PATH Act also makes permanent the 15-year depreciation life for certain qualified leasehold improvements, qualified restaurant property and qualified retail improvements. In addition, some of the property qualifying for the 15-year deprecation may also qualify for bonus deprecation under the definitions for qualified improvement property.
Additionally, the PATH Act maintained a benefit for many small businesses. It makes permanent the provisions for expensing certain qualified asset purchases for small business. Qualifying businesses may be entitled to claim up to $500,000 of asset cost as a deduction. This benefit, also known as section 179, has assisted small businesses for many years.
Also extended through 2019 is the provision that allows corporations to elect to forgo bonus depreciation and use the straight-line method in return for the ability to use additional AMT credits. The additional tax credits are refundable to a corporation if they exceed the actual tax liability of the corporation. The calculation is a bit complicated and there are some limitations, so understanding the details is important.
Businesses evaluating any of these depreciation benefits may want to consider a cost segregation analysis to evaluate which provisions may apply to specific asset additions so a determination can be made of the benefits of the various depreciation provisions.
In summary, it appears the path to lower taxes is enhanced by the PATH Act, but the provisions described above have many technical requirements and details. Working with professional tax advisers will assist to identify what can and cannot benefit a business.
In addition, there are many other provisions enacted in the PATH Act that are not described here. Reviewing the full package of tax provisions is necessary to be in a position to properly evaluate what is appropriate for a particular business.
Of course, after the 2016 elections, tax policy may change and these specific tax provisions may be modified, changed dramatically or eliminated from the tax code. No one has a crystal ball to foretell the future on the elections and what happens after. After all, who would have predicted the current political drama in the presidential primary races?
Benjamin Franklin said nothing was certain in life but death and taxes. However, he didn’t elaborate on how the taxes would be determined or calculated. Perhaps taxes were a lot simpler 200 years ago.
Bill Roth is a tax partner with the local office of BDO USA LLP. The views expressed are those of the author and not necessarily BDO. The comments are general in nature and not to be considered specific tax or accounting advice. Readers are advised to consult their professional advisers before acting on any items discussed.