By Mark Jaeger, Director of Tax Development, TaxAct
In December 2015, Congress gave business owners a nice year-end gift by approving a bill that extended many expired or expiring tax breaks for business owners. The Protecting Americans from Tax Hikes (PATH) Act includes several provisions that may reduce your business taxes.
Key business tax provisions in the PATH Act:
Enhanced section 179 deduction
With this now-permanent deduction, business owners can deduct up to $500,000 in the year that qualified new or used property is placed into service. The deduction amount phases out at $2 million, after which the deduction amount is dollar per dollar. (The deduction would have been reduced to $25,000 without PATH.)
Qualifying expenses include machinery, equipment, computer software available to the public and real property. (Note: Although rental property does not qualify, landlords may qualify for the next topic covered, bonus depreciation.)
If you only include part of the qualifying property cost as a section 179 deduction, you can generally depreciate the cost you do not deduct (see bonus depreciation).
This extended provision allows businesses to continue deducting 50 percent of certain long production property covering new assets (including rental property) in the tax year it was placed in service. Bonus depreciation will remain 50 percent through 2017, then drop to 40 percent in 2018 and 30 percent in 2019.
Hint: If your property qualifies, your tax benefit may be greater with the above enhanced section 179 deduction.
S corporation built-in gains period
If your S corporation was previously structured as a C corporation, the period you must hold assets after the conversion to avoid tax on built-on gains has been reduced to five years (previously 10 years).
Research and development credit
Increased from 14 to 20 percent, this now-permanent credit enables businesses to conduct certain types of research. Starting in 2016, businesses can use the credit to offset their alternative minimum tax (AMT) liability and startups can use it to offset payroll taxes.
Empowerment zone employment credit
If you employed qualified empowerment zone employees during 2015, you can claim this credit for 20 percent of qualified wages, up to $15,000 per employee. This credit is now permanent.
Partnerships and S corporations must file Form 8844, Empowerment Zone Employment Credit. Otherwise, report the credit on Form 3800, General Business Credit.
Exclusion of gain on qualified small business stock
This exclusion was scheduled to be reduced to 50 percent starting in 2015, but the PATH Act made the 100 percent exclusion on gains from sale of small business stock held for at least five years permanent.
Work Opportunity Tax Credit (WOTC)
Taxable businesses that hire workers from targeted economic groups, as well as tax-exempt employers who hire military veterans, can claim this credit through 2019. The maximum credit is $9,600 per qualified veteran and $6,240 for tax-exempt organizations, with the amount depending on each veteran’s situation.
The WOTC amount is calculated on Form 5884 for taxable businesses and reported on Form 3800, General Business Credit. Tax-exempt organizations claim it on Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans, as a credit against the employer’s share of Social Security tax.
New markets credit
The PATH Act authorized $3.5 billion in new markets credits retroactive to 2015 and through 2019. The credit is awarded to individuals and businesses who make Qualified Equity Investments (QEIs) in qualified community development entities (CDEs), intended to create jobs and materially improve the lives of residents of low-income communities.
The credit equals 39 percent of the QEI and is claimed over seven years, with five percent for the first three credit allowance dates and six percent for the last four credit allowance dates.
Indian employment credit
Businesses with employees who live on or near an Indian reservation may qualify for this credit that’s claimed on IRS Form 8845, Indian Employment Credit, for 2015 and 2016.
The maximum credit amount is 20 percent of the excess of current qualified wages and employee health insurance costs over amounts paid or incurred during 1993. Your credit is decreased by any Work Opportunity Credit amount claimed for the same employee.
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