Posted December 23, 2015 at 08:56 PM
We are excited about the expansive Protecting Americans from Tax Hikes Act of 2015 (PATH Act). Many provisions will have a positive impact on our clients. The Act has made the Research Tax Credit permanent and expands opportunities to utilize the credit for tax years beginning after December 31, 2015. Eligible small businesses (gross receipts of $50 million or less) may utilize the research tax credit against Alternative Minimum Tax (“AMT”). Eligible startup businesses (gross receipts of less than $5 million and no gross receipts for the prior five years) may apply up to $250,000 of research credit against its payroll tax liability.
Sample Application for Eligible Startup Business: A technology company in Atlanta has been in a net operating loss position since its inception in 2014. The company’s product development group engages in research and development activities at its Atlanta location that qualify for the research credit. The company will have gross receipts of $3.5 million in 2016 with an estimated FICA liability of $80,000 and a Georgia payroll tax liability of $40,000. The company may claim a federal research credit of $100,000 and a Georgia research credit of $25,000 for the 2016 tax year. The company may offset $80,000 of its FICA liability with the federal research credit and apply all of its $25,000 Georgia research credit against its Georgia payroll tax. The unused $20,000 of federal research credit may be carried forward for 20 years.
The PATH Act extends bonus depreciation (additional first-year depreciation) through 2019 but begins to phase this important tax benefit down. For tax years 2015 through 2017 bonus depreciation is extended and remains at 50% but reduces to 40% in 2018 and down to 30% in tax year 2019. The PATH Act extends and makes permanent 15-year straight-line depreciation for Qualified Leasehold Improvement Property, Qualified Restaurant Property and Qualified Retail Property.
An interesting definition was added to what qualifies for bonus depreciation beginning in 2016. The new definition of Qualified Improvement Property was added that allows for bonus depreciation to be taken on qualified interior construction costs that otherwise wouldn’t qualify for Qualified Leasehold Improvement Property. For example, the real property of a renovation of interior common space of a multi-tenant office building would be 39 year property eligible for bonus depreciation beginning in 2016. This new definition does not require the three year placed in service but rather “previously placed in service”, and would ostensibly render certain interior portions of Qualified Restaurant Property and Qualified Retail Property eligible for bonus depreciation. Care should still be taken as the rules are still in place as to what constitutes qualified property and in navigating these changes.
Section 179 expensing has also been made permanent. Section 179 expensing is now set at the $500,000 level for any new or used equipment. Businesses with over $2 million of purchases will have the expense deduction phase out dollar for dollar up to $2.5 million. In addition, the Section 179 maximum is now indexed to inflation in $10,000 increments for future years. Qualified real property is now eligible without the $250,000 maximum and the air conditioning unit exception is no longer in place. The bill continues to allow expensing for computer software. The Section 179 expensing should be coordinated with respect to the new tangible property rules and the De Minimis Safe Harbor to optimize the amounts of eligible business expenses.
Many energy incentives were extended and modified. Most notably was the Section 179D Energy Efficient Commercial Buildings Deduction. A deduction of up to $1.80 per square foot for the implementation of energy efficient design elements into a new building or renovation that exceeds a specified energy savings threshold has been extended through 12/31/16. It’s important to note that the energy standards have been raised beginning in 2016 from ASHRAE 90.1-2001 to ASHRAE 90.1-2007. This is significant as this will required more stringent energy savings in order to qualify for this deduction.
The Act extends the Work Opportunity Tax Credit through 2019 and now applies to hires of qualified long-term unemployed individuals (unemployed for 27 weeks or more). The credit is increased to 40 percent of the first $6,000 of wages for those employees.
Please contact Advanta at 678-638-6131 or firstname.lastname@example.org to discuss how the legislation may impact your business. We would love the opportunity to partner with you and your business.