Small business owners should be prepared for changes as Dec. 31 bears down on us.
It’s evident through working with small business owners on a daily basis that they have a wide range of duties and responsibilities to ensure their businesses are successful. It can be difficult to prioritize tasks—and sometimes, paying Uncle Sam is the last thing owners want to ponder. However, there are things small business owners need to keep in mind before the year ends on Dec. 31.
The Protecting Americans from Tax Hikes (PATH) Act of 2015 extended many taxpayer-friendly provisions. Internal Revenue Code Section 179 generally allows small businesses to immediately deduct (as opposed to capitalizing and depreciating) the cost of qualifying equipment and software placed into service during the tax year. With the PATH Act, § 179 expensing was extended and made permanent at the $500,000 maximum annual expensing limit and the $2 million investment-based phase-out limit.
Both limits are indexed for inflation for tax years beginning after Dec. 31, 2015. The PATH Act also extended bonus depreciation for qualified property (generally new, not used, tangible personal property) placed in service before Jan. 1, 2020, with
a built-in p
hasedown in the five-year extension window. For property placed in service during the 2016 and 2017 tax years, businesses can immediately deduct 50 percent of the cost of qualified property and depreciate the remaining cost over its applicable tax recovery period.
The bonus d
epreciation rate is reduced to 40 percent for qualifying property placed in service during 2018 and 30 percent in 2019. Keep these accelerated depreciation deductions in mind when considering the tax implications of when and if to purchase tangible personal property.
Nonresidential, real property assets, e.g., buildings and their structural components, are generally
depreciated using a straight-line method over a 39-year recovery period. The PATH Act made permanent a 15-year recovery period for certain assets, specifically qualified leasehold improvements.
Time may be running out to make sure your small business is positioned to take advantage of key tax savings before Dec. 31.
The 15-year recovery period also applies to certain qualified retail and restaurant improvements. Subject to exceptions, qualified leasehold improvement property generally includes any improvement to an interior portion of a building that’s non-residential real property if the improvement is made under or pursuant to a lease with an unrelated party, the building’s interior portion is exclusively occupied by the lessee (or any sublessee) of that portion and the improvement was placed in service more than three years after the date the building was first placed in service.
Of course, a 15-year recovery period will result in larger annual depreciation deduction amounts when compared to a 39-year recovery period—however, the most significant tax benefit of this provision is that qualified leasehold improvements are eligible for bonus depreciation. Remember this tax treatment when entering into and negoti-ating tenant improvement clauses in future lease agreements.
The PATH Act permanently extended and expanded the research and experimentation tax credit. This credit may result in reduced tax obligations and refund opportunities for taxpayers investing in the development or improvement of certain products, processes, software or technology. For tax years beginning on or after Jan. 1, 2016, modifications to the credit include the ability for eligible small business taxpayers to apply the credit against alternative minimum tax and for small startup businesses with limited taxable income to apply the credit against up to $250,000 of their payroll tax liability. If you think your business might benefit from this credit, enlist the help of your tax adviser for further guidance and assistance.
If your business is treated as a partnership for federal income-tax purposes, be aware your business’s tax returns now have an original due date of March 15 (or 2 months after year-end) for calendar-year entities, which is one month earlier than the historical due date of April 15 (or 3 months after year-end). Individual income-tax return due dates remain unchanged and will still be due on April 15. The due date for calendar year C-corporations has changed from March 15 to April 15.
It’s important to remember that timing is critical in taking advantage of the tax planning opportunities extended by the PATH Act. Consult with your tax adviser in the coming weeks to make sure you take the necessary steps prior to the year’s end to take advantage of these opportunities.