Dec 28, 201512:43 PMVan Lines
with Joe Vanden Plas
An overdue holiday gift basket for small businesses
(page 2 of 2)
With regard to bonus deprecation, the bill extended this benefit to property placed in service before Jan. 1, 2020. Berman says taxpayers can take an additional depreciation deduction of 50% for property placed in service in 2015, 2016, and 2017. “This allows a taxpayer to take an additional depreciation deduction of 40% for property placed in service 2018,” he adds, “and an additional depreciation deduction of 30% for property placed in service in 2019.”
Bonus depreciation generally applies to new/original-use property that has a 20-year life or less, Meicher adds, and it is not restricted to machinery and equipment. It includes land improvements and structures with 15-year lives such as fast food restaurants and service stations, etc.
So far, so good, and it gets even better.
The research credit was not only made permanent but it also was expanded so that the credit can offset both regular and alternative minimum taxes for an eligible small business, one with $50 million or less of gross receipts. The expanded credit also can offset employer FICA liability for a small startup business, one with less than $5 million in gross receipts.
For Meicher, offsetting the AMT is “really huge” for small businesses that are S corporations because the credit passes through.
Many businesses haven’t taken advantage of the research credit, in part because they don’t understand it, but they now have more incentive than ever. The research credit came about in the late 1980s as a tax credit for companies that increased their research-and-development expenses — using 1984–88 as the base years. It only applied to new things like a breakthrough drug or new medical equipment, so it was not really applicable to most small businesses.
In 2004, the law was changed to say that a business could apply the credit to all things that are new to your business. The problem was that small businesses did not have a basis of comparison from those original base years.
Then the government changed the base years to the previous three years, but also said businesses had to increase expenditures each year to qualify for the credit.
With the expanded credit businesses get to deduct it twice. “In effect, you receive double benefit from these expenses — a tax deduction and a tax credit,” Meicher explains. “This is an amazing thing for small businesses.”
Yet another alternative applies if a company does not have any base years, Meicher states. It allows businesses in this situation “to simply take 6% of the current year research expense and reduce it by 35%,” he explains.
Another important extender applies to corporations that have recently elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. The extender package made permanent a reduction in the recognition period from 10 years to five years. Previously, an S corporation had to pay corporate level income taxes — 35% — on the appreciation in assets that existed at the date of the election if there is a sale or other taxable disposition of an asset during the recognition period.
As Berman explains, this caused a double tax on the gain on a taxable disposition during the recognition period. “A lot can happen in 10 years that had not been anticipated when the election was made,” he notes. “With that reduced to five years, things still can happen to cause the sale of assets that were appreciated at the time of the ‘S election’ and incur the double tax, but with the period reduced, planning for this concern is more manageable.”
In cased you missed it, the legislation also suspends the Affordable Care Act’s tax on medical devices in 2016 and 2017, it delays the so-called Cadillac tax on expensive health plans from 2018 to 2020, and it extends by five years certain clean energy tax credits for wind and solar.
Most importantly, it represents long overdue recognition that small businesses need some consideration.
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