The Internal Revenue Service (IRS) has many tax changes planned for business taxpayers, and not being aware of them could cost taxpayers significantly. These changes have been brought by various acts, such as: The Protecting Americans from Tax Hikes (PATH) Act of 2015; The Fixing America’s Surface Transportation (FAST) Act; The Bipartisan Budget Act of 2015; The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015; The Trade Preference Extension Act of 2015; and The Achieving a Better Life Experience Act of 2014 (ABLE Act), part of the Tax Increase Prevention Act of 2014.
Taxpayers are advised to consult their tax professionals regarding these changes and plan their tax measures accordingly.
Here is a brief overview of the various tax changes for 2016 summarized by AG Tax experts.
2016 Tax Changes
Enhanced Sec. 179 Deduction
For tax years beginning in 2014, the dollar limitation on the expensing deduction under Code Sec. 179 was $500,000; and the investment-based reduction in the dollar limitation began to take effect when property placed in service in the tax year exceeded $2 million (the investment ceiling). Under prior law, for tax years beginning after Dec. 31, 2014, the maximum expensing limit was to have dropped to $25,000, and the investment ceiling was to have dropped to $200,000. Up to $250,000 of qualified real property—qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property—was eligible for Code Sec. 179 expensing. Under a carryover limitation for qualifying real property, no portion of disallowed expensing because of the active business taxable income limit in Code Sec. 179(b)(3)(A), could be carried to a tax year beginning after 2014.
Under the PATH Act, the $500,000 expensing limitation and $2 million investment ceiling amount are retroactively extended and made permanent. Additionally, the PATH Act makes other Code Sec. 179 changes.
Increased De Minimis Safe Harbor Expensing Limit
The final tangible property regulations permit businesses to elect to expense their outlays for “de minimis” business expenses. If the taxpayer is eligible for the de minimis safe harbor election, and chooses it, an amount paid to acquire or produce any eligible unit of property (or any eligible material or supply) is deducted under Code Sec. 162 in the year paid or incurred.
Bonus Depreciation
Under prior law, qualified leasehold improvement property qualified for bonus depreciation. Such property included any improvement to an interior portion of a building that was nonresidential real property, if (1) the improvement was made under or pursuant to a lease; (2) the interior building portion was to be occupied exclusively by the lessee or sublessee; (3) the improvement was placed in service more than three years after the date the building was first placed in service by any person (i.e., not necessarily the taxpayer) and (4) the improvement was a structural component of the building. However, qualified leasehold improvement property didn’t include any improvement for which the expense was attributable to (a) enlargement of the building, (b) any elevator or escalator, (c) any structural component benefiting a common area, or (d) the internal structural framework of the building.
Under the PATH Act, qualified leasehold improvement property is no longer eligible for bonus depreciation. Instead, for property placed in service after Dec. 31, 2015, “qualified improvement property” is eligible for bonus depreciation.
The PATH Act liberalizes the rules in three ways: (1) building improvements are eligible for bonus depreciation regardless of whether the improvements are property subject to a lease; (2) the improvement need not be placed in service more than three years after the date the building was first placed in service; and (3) structural components of a building that benefit a common area are no longer excluded from the definition of qualified improvements.
Relaxed placed in service rule for claiming bonus depreciation on certain plants: Under the PATH Act, for specified plants planted or grafted after Dec. 31, 2015, and before Jan. 1, 2020, bonus depreciation is allowed when the plant is planted or grafted, rather than when placed in service. A specified plant is one planted or grafted in the US, that is, any tree or vine that bears fruits or nuts, or any other plant that will have more than one yield of fruits or nuts and generally has a pre-productive period of more than two years from the time of planting or grafting to the time at which the plant bears fruit or nuts.
Research Credit to Offset AMT, Payroll Tax & Regular Tax
For credits determined for tax years that begin after Dec. 31, 2015, eligible small businesses may claim the credit against their alternative minimum tax liability as well as their regular tax liability.
For tax years that begin after Dec. 31, 2015, qualified small businesses may elect to claim a portion of their research credit as a payroll tax credit against their employer FICA tax liability, rather than against their income tax liability.
Enhanced Deduction for Food Inventory
A taxpayer engaged in a trade or business is eligible to claim an enhanced deduction for donations of food inventory. The enhanced deduction equals the lesser of (a) basis plus half of the ordinary income that would have been recognized if the property were sold at fair market value at the contribution date, or (b) twice the property’s basis. A contribution of food inventory that is apparently wholesome food—i.e., meant for human consumption and meeting certain quality and labeling standards—qualifies for the enhanced deduction. For a taxpayer other than a C corporation, the aggregate amount of contributions of apparently wholesome food that may be taken into account for the tax year can’t exceed 10 percent of the taxpayer’s aggregate net income for that tax year from all trades or businesses from which those contributions were made for that tax year. A corporation’s deductions for charitable contributions can’t exceed 10 percent of its taxable income as specially computed.
The PATH Act retroactively and permanently extended the apparently wholesome food contribution rules. Additionally, for tax years beginning after Dec. 31, 2015, the PATH Act also liberalized the rules for such contributions.
More employers eligible for differential wage payment credit: Eligible small business employers that pay differential wages—payments to employees for periods that they are called to active duty with the US uniformed services (for more than 30 days) that represent all or part of the wages that they would have otherwise received from the employer—can claim a credit. This differential wage payment credit is equal to 20 percent of up to $20,000 of differential pay made to an employee during the tax year. Under prior law, an eligible small business employer was one that: (1) employed on average less than 50 employees on business days during the tax year; and (2) under a written plan, provides eligible differential wage payments to each of its qualified employees. A qualified employee is one who has been an employee for the 91-day period immediately preceding the period for which any differential wage payment is made.
The PATH Act not only retroactively and permanently extended the credit (which had expired at the end of 2014), but liberalized it as well. For tax years beginning after Dec. 31, 2015, the credit applies to employers of any size (i.e., the less than 50 employee average no longer applies).
Expansion of Work Opportunity Tax Credit (WOTC)
The Work Opportunity Tax Credit allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of wages. The WOTC varies by targeted group.
The PATH Act retroactively extended the WOTC for five years so that it applies to eligible veterans and non-veterans who begin work for the employer on or before Dec. 31, 2019. Additionally, effective for individuals who begin work for an employer after Dec. 31, 2015, the WOTC also applies to employers who hire workers who are members of a new targeted group—qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more).
AG Tax LLP Can Help
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