As the year begins to draw to a close, there are a number of changes in tax laws that business owners will want to consider as they look ahead to the 2017 tax filing season.
The changes offer opportunities to take advantage of limited expensing of capital expenditures, bonus depreciation, new filing deadlines for partnerships and corporations, and broadened eligibility for research and development tax credits. In addition to new IRS audit rules for partnerships, pending changes in the rules for valuing minority interests in family businesses should also be considered. There’s also the outcome of the presidential election to take into account as well.
Although companies should consult their tax advisors for a fuller understanding of how these changes will impact their particular tax situation, here are some details on the changes.
Section 179 expensing/bonus depreciation
Businesses should derive some peace of mind from the fact that previously temporary provisions for limited expensing of capital investments and bonus depreciation have now become permanent.
Under Section 179 of the tax code, the expensing provision allows capital investments of up to $500,000 for certain property to be taken as an expense deduction — rather than being depreciated. The break — which was made permanent under the PATH Act passed at the end of 2015 — phases out for asset purchases above $2 million. In another change, air conditioning and heating units are now eligible for the expensing provision for tax years beginning after Dec. 31, 2015.
The bonus depreciation provision allows businesses to claim additional depreciation for certain property in the first year of the recovery period if placed in service from 2015 to 2019 (with an additional year for certain property with a longer production period). For property placed in service in 2015, 2016 and 2017, the bonus depreciation is 50 percent. For 2018, it drops to 40 percent; for 2019 it goes to 30 percent.
Tax deadline changes for partnerships and corporations
The American Institute of Certified Public Accountants has been advocating for changes to various tax return due dates since 2006. Problems arose when Schedules K-1 from partnerships arrived on or near the deadline for investors to file. The changes are designed to make flow-through entity returns due before the investor’s tax return is due.
Partnerships that operate on a calendar-year basis will have to file or extend their tax returns (Form 1065) by March 15 rather than April 15. This change will make the due date the same as S-corporations.
The due date for C Corporations that operate on a calendar-year basis is being moved from March 15 to April 15. The deadline will also be changed for C Corporations using a different filing period, as will the deadlines for partnerships using a different filing period. A chart of those changes may be found here.
Eligibility broadening R&D tax credit
The research and development tax credit was made permanent by the PATH Act. More businesses may be able to take the credit now that some costs of developing software for internal use and third-party interaction have been made eligible.
Internal-use software is rarely eligible for the research and development tax credit. If identified as internal use, the development efforts must meet the standard four-part test in addition to the three-part test of being highly innovative, involving significant economic risk, and being commercially unavailable for taxpayer use. Conversely, software that is not defined as internal use is not subject to the three additional High Threshold of Innovation qualifiers. Under the final regulations, this includes any developed software that is intended to be:
- commercially sold, leased, licensed, or otherwise marketed to third parties
- enables the taxpayer to interact with third parties
- allows third-parties to initiate functions or review data on the taxpayer’s system
These final regulations offer favorable guidelines and clarification for businesses that develop new and improved software intended to be sold or used as third-party interactivity.
National election results
Now that the election is over, business leaders will want to consider how new tax policies might affect their business
As Neil Irwin, senior economic correspondent at The New York Times has explained, President-elect Donald Trump has indicated that he would sharply cut the top tax rate on corporate profits to 15 percent. And he wants to apply that rate to partnerships and other types of businesses that currently pass their profits on to individuals who then are taxed at individual income rates as high as 39.6 percent. Trump proposes to simultaneously eliminate a wide range of business deductions. With the new, lower rate, businesses that earn money overseas and currently keep it outside the United States would have less incentive to do so. The proposal would sharply reduce the tax burden on companies, reducing government revenue by $1.9 trillion over the next decade, according to the Tax Foundation’s estimate.
New partnership audit rules
Effective in 2018, the IRS has issued new audit rules for partnerships that make partnerships liable at the entity level for tax collections associated with audits, rather than the partners themselves.
The changes, which will have a significant impact on how partnership interests are valued and transferred, are quite complex, and those involved in partnerships should consult their tax advisors for an assessment of the impact on them.
Pending estate planning changes
The IRS has proposed changes in the rules for how minority stakes in family-owned businesses are valued when owners transfer interests to the next generation during their lifetimes. The changes have not been finalized, and business owners who have been considering passing along part of their ownership interests may want to consult with their tax advisors about accelerating those plans to take advantage of current rules.