The exciting thing about theProtecting Americans from Tax Hikes Act of 2015(the “PATH Act”)—and yes, a tax bill can be exciting—is that it makes 20 different tax provisions permanent.
There are really lucrative tax provisions, like research and development (“R&D”) credits, credits for improving certain kinds of property (which means additional depreciation to claim) and increased expensing limits—just to name a few of the more exciting sections. Other tax provisions were also renewed for several more years.
That’s good news whether you’re a startup, you’re ready to scale and expand, or you’re an established company trying to stay innovative. The PATH Act has a lot of details—more than we can elaborate on in a short article.
So, use this information as a high-altitude glimpse of what’s potentially available. Then, work with a qualified tax professional to dig deeper and see what you qualify for specifically.
Research and Development Credit
The R&D credit is a federal tax subsidy for spending on qualified research activities. (A list ofqualifying activities can be found under Internal Revenue Code (“the Code”) Section 41.) There are two ways to calculate the credit. This credit is worth either:
- 20 percent of the excess of the taxpayer’s qualified research expenses (“QREs”) over a base amount
- 14 percent of the amount by which the taxpayer’s QREs for the taxable year exceed 50 percent of the taxpayer’s average QREs in the prior three taxable years
QREs generally include employee wages and supply costs directly attributable to qualified research activities and 65 percent of payments made to outside contractors who perform those activities.
The PATH Act makes this credit permanent and retroactive to January 1, 2015.
Other highlights:
- Eligible small businesses bythe government’s definition under IRC Section 38(c)(5)(C)can use the R&D credit to offset Alternative Minimum Tax (“AMT”) liabilities.
- Qualified small businesses, which have their own government definition also under IRC Section 41, can use R&D credits against up to $250,000 in payroll taxes.
- Now that the credit is permanent, it could be valuable to construction and hardware companies that do design-build work; design tools, jigs, molds and dies; develop or test new products, materials, and concepts; improve existing products; and/or conduct trial-and-error experiments.
Again, make sure you check with a tax accountant to get the details and to see if you qualify.
Bonus Depreciation for Qualified Leasehold Improvements
The 15-year straight-line cost recovery period for qualified improvement property (i.e., leasehold, restaurant, and retail property) has been permanently extended. The amendments are effective for property in service after December 31, 2014. Fiscal-year taxpayers that didn’t write off qualified improvements canclaim additional depreciation.
The definition of qualifying improvement property includes “any improvement to an interior portion of a building which is nonresidential real property.” However, in order to qualify, the improvement has to have been made three years after the building was placed in service.
Section 179 Expensing
A taxpayer can expense the cost of qualifying property, subject to limitations, rather than recover those costs through depreciation deductions over time under Code Section 179. The PATH Act permanently extends this provision. It also increases the maximum expense to $500,000, which is reduced by the cost of qualifying property in excess of $2 million (total phase-out at $2.5 million). The limitations are indexed to inflation in $10,000 increments.
More exciting developments: off-the-shelf software is now permanently treated as qualifying property. HVAC units are eligible for taxable years after 2015. The $250,000 limitation of carryovers and maximum amount available for qualified real property extends through 2016.
Bonus Depreciation under Section 168(k)
Bonus depreciation under section 168(k) for original use property was extended through 2019 but on a phase-down basis. For taxable years 2015 through 2017, qualified property starts with 50 percent first-year bonus depreciation. In 2018, the phase-down starts with 40 percent first-year bonus depreciation. In 2019, bonus depreciation drops to 30 percent.
The PATH Act expands the definition of “qualified property” under section 168(k) from “qualified leasehold improvement property” to “qualified improvement property.” The tax code defines qualified improvement property as “any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service.”
That means bonus depreciation is no longer limited to improvements made more than three years after the building was placed in service. However, this limitation is still in place for 15-year straight-line cost recovery of qualified leasehold improvement property.
Also enhanced is the refundable AMT (reminder: Alternative Minimum Tax) credit regime of section 168(k)(4), which allows companies to forego bonus depreciation and claim a refundable AMT credit. A corporation that uses the refundable AMT credit must use the straight-line method of depreciation rather than MACRS to recover basis.
The amount of the refundable credit is determined by taking into account past bonus depreciation, subject to:
- 6 percent of pre-2006 unused AMT credits for property placed in service during 2015; and
- 50 percent of pre-2016 unused AMT credits for property placed in service during 2016 through 2020.
Other Credits Worth Looking Into
The PATH Act is full of tax credit gems, including lots of energy credits (most of which expire at the end of 2016, but extensions are expected). Another noteworthy credit is the Work Opportunity Tax Credit (“WOTC”).
As this WOTC videoexplains, employers can earn tax credits for hiring from different groups of people, including the long-term unemployed, veterans and SNAP or TANF recipients.
Other credits worth asking an accountant about are:
New Markets Tax Credit
Empowerment Zone Tax Incentives
Differential Wage Payment Credit
Low-Income Housing Credit
We’ll chat about those in another piece.
Here’s a quick rundown of some highlights from the PATH Act, including some we couldn’t get to today:
