As they say, “Nothing is certain but death and taxes.” Yet, many tax provisions carry year-end expiration dates, therefore taxes have proven far from certain and certainly far from predictable. Until recently, taxpayers played a guessing game about whether or not tax provisions would be extended, making tax planning difficult.
Seeking to end some of the confusion, the Protecting Americans from Tax Hikes (PATH) Act is a federal law enacted in late 2015. The PATH Act made some temporary tax provisions permanent and extended others. Some of the provisions, like education and child tax credits, affect personal taxes more than business taxes. The PATH Act laws that have the biggest impact on business owners involve research and development credits and depreciation. Business owners that are required to take required minimum distributions from their IRA’s also rely on a permanent tax benefit in the form of a Qualified Charitable Distribution.
Research and Development Credit
Tax credits on research and development (R & D) costs help make investing in R & D more lucrative for businesses. However, investing in R & D is less appealing when the impact of that tax credit could be limited or phased out, and its’ availability is uncertain until year-end. With the enactment of the PATH Act, companies now have a permanent and potentially more valuable credit available.
Under the PATH Act, provisions that limited the benefit of the R & D credit by restricting taxpayers who paid alternative minimum tax (AMT) from using the credit have been removed for “eligible small businesses”. Eligible small businesses have $50 million or less in gross receipts. Additionally, a “qualified small business” can elect to apply at least a portion of the R & D credit against their payroll tax liabilities. These significant changes to the R & D credit should cause closely-held businesses to review their research and development activities more carefully.
Calculating depreciation has long been a complicated process involving tracking purchases over long periods of time in complex spreadsheets or tax software. Section 179 allows a write-off of a specified amount of qualified purchases each year. Before the PATH Act, it was always uncertain until very late in the year, or even after year-end, what the Section 179 maximum allowance would be. Businesses would struggle with year-end purchase decisions given the lack of clarity in the law.
The PATH Act made Section 179 more favorable on a permanent basis. Starting in 2016, businesses could rely on a $500,000 maximum allowance, phased out with more than $2,010,000 of qualified purchases. These amounts are indexed annually for inflation.
In addition to Section 179, a bonus depreciation provision was included in the PATH Act. While this provision was not made permanent, it was extended through 2019. The bonus depreciation provision allows for a tax deduction of 50% of any depreciable amounts remaining after taking 179 deductions, through 2017. In 2018, the bonus depreciation rate will be 40%; in 2019, the rate will be 30%. Bonus depreciation is scheduled to end after 2019.
Knowing the tax impact of purchases of property and other assets helps businesses make wiser purchase decisions.
For taxpayers over retirement age who are interested in making donations to charities, a direct transfer from an IRA to a charity can be free from income tax. One of the provisions made permanent by the PATH Act ensures that charitable contributions made directly from an IRA are not considered income. However, they also do not qualify for tax deduction. This particular provision is most used by wealthier taxpayers who are required to take out required minimum distributions and have charitable intentions.
With the PATH Act, taxpayers now have access, in part, to the IRS playbook, making tax planning more predictable. More consistent rules contribute to wiser decision-making. And while the requirement to pay taxes is always certain, tax laws themselves seem to be ever changing. If your company invests in R & D or if you have any questions about the impact of the PATH Act on depreciation or charitable contributions, please contact us today.