Tax Planning Ahead With Certainty - Really?
If you thought tax planning was difficult or nearly impossible to do on your own before, it's worse now. Owners of small and midsize businesses are often saddled with the need to reduce taxation and plan for tax implications throughout the year. They have more of a need than larger corporations to find ways to reduce liability. Yet new laws passed by Congress this year make it quite difficult. Although the new tax extender laws, under the blanket name "Protecting Americans From Tax Hikes Act of 2015" seem to offer benefits to businesses, the biggest implication is the addition of complexity. In other words, you really need to reach out to a tax adviser to protect your business interests and reduce your tax liability.
What business-related changes has the new tax extender legislation imposed?
The tax extenders agreement was a bipartisan change to tax law that was designed to modify several business (and personal) tax provisions and added new ones to reduce tax fraud. Below are some of the specific business-related changes you'll see.
The research credit, which provides companies that develop, design or improve techniques, processes, software or formulas with up to a 20 percent credit for expenditures, was extended. This credit, which began in 1981, but has not been in place continuously during that time, was made permanently available retroactively.
Work opportunity tax credit
The work opportunity tax credit allows employers to claim 40 percent of an employee's first-year wages if the employee was hired from specific groups. The credit has been retroactively extended through the new law for five years, but it has changed somewhat. It now applies to veterans and nonveterans as well as some long-term unemployment benefits recipients. Though complex, it is quite a valuable credit.
100 percent exclusion of gain
For qualified small businesses, which are domestic C corporations with less than $50 million in assets, the 100 percent exclusion of gain credit may apply. It allows these businesses to exclude some gain realized on the exchange or sale of stock held for more than five years.
Differential wage payment credit
The differential wage payment credit provides up to 20 percent of up to $20,000 in differential pay made to qualified employees during the year. The law makes this credit permanent for tax year 2015 for any size employer. Specifically, it relates to the pay provided to an active duty military service professional.
While these credits may seem like a good thing, the complexities of the tax extender laws are more complex than this. Consider these additional changes:
Section 179 election
The statutory expense limit was extended to $500,000, and the $2 million investment limit has been made permanent. In 2010, the expense cap was raised from $25,000 to $100,000 and then to $500,000. However, this expired in 2014. This applies to qualified leasehold improvements, qualified restaurant property, computer software and retail improvements, as well as other investments businesses make.
As a way of stimulating the economy, bonus depreciation was set at 50 percent in 2008 and extended through 2014, with a period of a 100 percent boost. The new law extends the 50 percent bonus through 2017. Specifically, it applies to property with a 20-year or less class life as well as leasehold improvements and certain food-sector industries.
Enhanced first year
Yet another change applies to autos and trucks. Bonus depreciation on luxury vehicles will be phased out through 2019. It's important to know how much depreciation you can apply for your vehicle investments.
The complexity of these new tax laws — though they often have good intentions of making key credits for business owners more accessible — has made filing taxes more difficult than ever. Tax planning, the process of creating a step-by-step plan for reducing tax implications, often involves many of these credits and rules. For this reason, business owners will need to be more vigilant than ever in compiling data and meeting the new specific limits and inclusion requirements.
It's essential now more than ever for business owners to see the value in hiring a professional to manage their tax planning needs. These new laws will directly affect how much tax you pay. Additionally, they should play a role in the decisions you make throughout the year, including who to hire, what improvements to make, and what investments to add to your company this year. By working with a skilled tax professional, you'll be able to streamline this process to ensure you are getting the very best result and the lowest tax liability within the limits of the law.