Tax Extender Bill 101: Business Tax Issues
In December, Congress came to a bipartisan agreement regarding tax extenders. To the surprise of many, some of these extenders were made permanent while others were only extended for a short period of time. Here is a look at some of the main provisions that have been included in the legislation in regard to small businesses:
Tax Extender Business Provisions:
Research Credit - The tax law offers a tax credit for up to 20% of qualified expenditures for those businesses that engage in the development, design or improvement of products, techniques, formulas, processes or software (and related activities). This credit has been available periodically since 1981 and was previously extended but expired at the end of 2014. This credit has now been retroactively made permanent. This is not a tax preference for small businesses.
100% Exclusion of Gain – Certain Small Business Stock - Formerly, for stock issued during the period between September 28, 2010 and December 31, 2014, non-corporate taxpayers could exclude up to 100% of any gain realized on the sale or exchange of qualified small business stock that was held for more than 5 years. In addition, there was no alternative minimum tax (AMT) preference when the exclusion percent equaled 100%. In most cases, the term "qualified small business" refers to any domestic C corporation that has assets of $50 million or less prior to issuing the stock. This provision is now permanent.
Differential Wage Payment Credit - During 2014, eligible employers at small businesses - typically those that have fewer than 50 employees and that continued to pay all or some of the wages of an individual working for them who was called into active duty military service could claim a credit based on those “differential wages”. This credit has been retroactively made permanent. The differential wage payment credit is equal to 20% of up to $20,000 of differential pay that was made to the employee during the tax year. For the years after 2015, this credit will apply to any size employer.
Work Opportunity Tax Credit (WOTC) - During 2014, employers were able to elect to claim a WOTC for up to 40% of each eligible employee's first year wages for workers hired from specific groups - not to exceed wages of $6,000 (for a maximum credit of $2,400). These first-year wages are the wages that were paid during the tax year for work that was performed during the one-year period starting with the date when the employee started working for the employer. This credit has been retroactively extended for the next five years through the year 2019. It can be applied to veterans and non-veterans and for the years after 2015, qualified long-term unemployment recipients are included in the list of targeted groups.
Section 179 Election - Beginning in the year 2003, the Section 179 election has been temporarily increased from its statutory limit of $25,000 to between $100,000 and $500,000. Starting in 2010, the expense cap has been $500,000 (or $250,000 on a married-filing separate tax return), and the investment limit has been $2,000,000. However, this extension expired after 2014; without an extension, the cap would have been reduced back to the statutory $25,000 limit in 2015. This expense cap of $500,000 and the investment limit of $2,000,000 have been made permanent and will be automatically increased periodically for inflation.
The application of the Section 179 election to "off-the-shelf" computer software, and qualified restaurant property, leasehold and retail improvements, has also been made permanent.
Leasehold and Retail Improvements and Restaurant Property - The class life for the qualified leasehold and retail improvements and restaurant property had been included temporarily as a part of the 15-year depreciation class life, instead of the 31-year category. Qualified leasehold and retail improvements and restaurant property have been retroactively and permanently included as a part of the 15-year MACRS class life.
Bonus Depreciation - In order to help stimulate the economy, a 50 percent bonus depreciation was temporarily implemented back in 2008 and was later extended through the year 2014. During the period from September 8, 2010 and before January 1, 2012, it was increased to 100%. Bonus depreciation applies to personal tangible property that was placed in service during the year for which the original use started with the taxpayer.
The 50% bonus depreciation has been extended to include eligible property placed in service prior to January 1, 2018. The bonus rates will be 40% and 30%, respectively, for property placed in service in 2018 and 2019. Bonus depreciation typically applies to property that has a class life of 20 years or less, to qualified leasehold improvements and certain types of plants that bear fruits and nuts planted or grafted prior to January 1, 2020.
Enhanced First-Year Depreciation for Autos and Trucks - There is a so-called luxury limit on the depreciation deduction for passenger cars and light trucks that are used for business purposes. For these vehicles that were placed in service during 2015, the limits are $3,160 and $3,460, respectively. Previously, the first-year luxury limit was increased by $8,000 when bonus depreciation was claimed. With this new law, the bonus depreciation that is applicable to luxury vehicles will be phased out through 2019. As a result, the luxury auto limits will be increased by these bonus depreciation amounts: $8,000 for 2015 through 2017, $6,400 for 2018 and $4,800 for 2019. So, for 2015, the first-year depreciation cap is $11,160 for most passenger cars and light trucks.
Managing the complexities of taxes today requires experience and the ability to adapt to ever-changing tax laws. Working with a proactive business advisor can help you look beyond the obvious to develop strategies to help minimize your taxes and increase your wealth opportunities.