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Federal Business Tax Planning - Deductions



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The extensions in the Protecting Americans from Tax Hikes (PATH) act covered a wide variety of areas, from depreciation to tax credits for research and development, and hiring workers with significant barriers to employment, to deductions that allow the expensing of certain capital investments. At the same time, there were changes in company obligations under the Affordable Care Act, including an extension on the moratorium on taxation on the sale of certain medical devices.

Here is a PATH act summary of new deductions to aid your business in tax planning.

Section 179 Expensing

Capital investments of up to $500,000 for certain property can be taken as an expense deduction, rather than being depreciated, under Section 179 of the tax code. The break, which was made permanent under the PATH Act passed at the end of 2015, phases out for asset purchases above $2 million (with no limitation on real estate). Additionally, air conditioning and heating units are now on the list of eligible property for tax years beginning after Dec. 31, 2015.

Important to note: the expense can only be used to offset net income, not reduce it to below zero to create a net operating loss.

Bonus Depreciation

Businesses can claim additional depreciation in the first year of the recovery period for certain property acquired and placed in service during 2015 through 2019 (with an additional year for certain property with a longer production period), under an extension authorized by the PATH Act. For property placed in service in 2015, 2016 and 2017, the bonus depreciation is 50 percent, while it drops to 40 percent in 2018 and to 30 percent in 2019.

New tangible property with a recovery period of 20 years or less qualifies for bonus depreciation. Important to note: Acquiring the property in a given year isn’t enough to claim the bonus depreciation. It must also have been placed in service.

The law also allows additional first-year depreciation for qualified improvement property after 2015 regardless of whether the improvements are on leased property. It also no longer requires that the improvements be placed in service more than three years after a building was first placed in service.

In lieu of bonus depreciation, taxpayers can choose to accelerate the use of Alternative Minimum Tax credits under special rules for property placed in service during 2015. Under last year’s law, the amount of unused AMT credits that may be claimed instead of bonus depreciation was increased beginning in 2016.

15-year Depreciation for Leaseholds and Improvements

Straight-line cost recovery over 15 years is available for qualified leasehold improvement property, restaurant property and retail improvement property. This provision was made permanent for property placed in service after Dec. 31, 2014.

Energy Efficient Commercial Buildings Deduction

Certain energy efficient commercial buildings can take a deduction up to a per building maximum of $1.80 per square foot. This deduction was extended by the PATH Act passed at the end of 2015 and will be effective through Dec. 31, 2016. It also applies retroactively to 2015.

S Corporation Provisions: 5-Year Built-In Gains Tax

The PATH Act made permanent a change in corporate taxes for S Corporations that were previously a C Corporation. Those S Corporations are required to pay corporate tax on certain dispositions of assets that were appreciated in the hands of the C Corporation at the time the S Corporation status became effective. Previously, the time period that the corporate tax was applied had temporarily been reduced to five years.

Also made permanent was a provision affecting the tax basis of S Corporation shareholders who receive a deduction when the S Corporation makes a charitable donation.

100 Percent Exclusion on Gains from Sale of Small Business Stock

With some limitations, taxpayers who are not corporations may exclude from income 100 percent of the gain from the sale of small business stock acquired when originally issued and held for at least five years. The exclusion has been made permanent for purchases of qualifying stock on and after Jan. 1, 2015.

Keep up-to-date with the latest tax developments on our Federal Tax Reform Resource Center.

Posted in: Tax
Tagged with: Business Tax