An overdue holiday gift basket for small businesses

We live in volatile political times. Witness the inter-party vitriol directed by the Tea Party against House Speaker Paul Ryan for the dastardly crime of reaching out across the aisle, working with Democrats, and actually getting something accomplished — especially for small businesses.

The man should be horsewhipped, except for the fact that the offending year-end bill offers some much-needed tax relief for small businesses, lifts an outdated oil export ban to boost the energy sector, and continues to fund the development of cleaner forms of energy. Notice there were wins there for both political parties, which is what has to happen if anything worthwhile is going to be accomplished with divided government.

And judging by the comments of local accounting executives and tax attorneys, the controversial legislative package has a number of worthwhile things for small businesses. Whether they are enough to improve economic conditions remains to be seen but I can’t help but think that Washington has finally done something for small employers.

Ron Berman, a tax attorney and CPA with the Neider & Boucher law firm, notes certain tax benefits kick in when a business acquires property, generally tangible personal property. Those benefits pertain to changes — permanent changes, thanks to the bill — in Section 179 expensing rules, bonus depreciation, and the research-and-development tax credit.

Under the new 179 expensing rules, a business can now expense up to $500,000 per year in purchases of eligible property. That was the limit from 2010 through 2014 but that would have gone down to $25,000 if the law had not been retroactively amended. This change is retroactive to tax years beginning in 2015 and the definition of Section 179 property was expanded to include more “qualified real property,” including certain computer software.

The limit for expensing is phased down if there is more than $2 million of 179 property that is placed in service in any given tax year. That also was the limit for 2010 through 2014 but that would have gone down to $200,000 if the law had not been retroactively amended.

“This change is retroactive to tax years beginning in 2015,” Berman notes, before adding the $500,000 limit and the $2 million phase-out threshold are indexed to inflation starting in 2016.

Section 179 expensing applies to tangible personal property primarily, according to Gordon Meicher, managing partner for Meicher & Associates. For anything that qualifies, there are three limitations in order to claim it:

  1. You must have active business income (wages at the individual level qualify).
  2. You can’t deduct more than $500,000 in any one year.
  3. There is an investment limit of $2 million per year; for every $1 over $2 million, you must reduce the $500,000. Accordingly, if you spend $2.1 on personal property, you are only allowed to claim $400,000. 



Bonus points

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.”

Small considerations

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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