Late last year, Congress made permanent more than 20 tax benefits and also extended many other important benefits through 2016 or 2019.
Now that your 2015 taxes are behind you, now is the time to take advantage of the many tax benefits available to businesses under the Protecting Americans from Tax Hikes (PATH) Act of 2015.
Business owners should strongly consider these five midyear tax strategies that could result in 2016 tax savings:
Buy equipment: The PATH Act preserves both the generous limits for the Section 179 expensing election and the availability of bonus depreciation. These breaks generally apply to qualified fixed assets, including equipment or machinery, placed in service during the year.
For 2016, the maximum Section 179 deduction is $500,000, subject to a $2,010,000 phaseout threshold. Without the PATH Act, the 2016 limits would have been $25,000 and $200,000, respectively. The higher amounts are now permanent and subject to inflation indexing.
Additionally, for 2016 and 2017, your business may be able to claim 50% bonus depreciation for qualified costs in excess of what you expense under Section 179. Bonus depreciation is scheduled to be reduced to 40% in 2018 and 30% in 2019 before it expires on Dec. 31, 2019.
READ MORE: More Tax Benefits Available to Business Owners through the PATH Act
Improve your premises: Traditionally, businesses must recover the cost of building improvements straight-line over 39 years. But the recovery period has been reduced to 15 years for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements. This tax break was reinstated and made permanent by the PATH Act.
If you qualify and your premises need remodeling, you can recoup the costs much faster than you could without this special provision. Keep in mind that some of these expenses might be eligible for bonus depreciation.
Ramp up research activities: After years of uncertainty, the research credit has been made permanent under the PATH Act. For qualified research expenses, the credit is generally equal to 20% of expenses over a base amount that's essentially determined using a historical average of research expenses as a percentage of revenues. There's also an alternative computation for companies that haven't increased their research expenses substantially over their historical base amounts.
Research activities must meet these criteria to be considered "qualified":
- The purpose must be to create new (or improve existing) functionality, performance, reliability or quality of a product, process, technique, invention, formula or computer software that will be sold or used in your trade or business.
- There must be an intention to eliminate uncertainty.
- There must be a process of experimentation. In other words, there must be a trial and error process.
- The process of experimentation must fundamentally rely on principles of physical or biological science, engineering or computer science.
Effective starting in 2016, a small business with $50 million or less in gross receipts may claim the credit against its alternative minimum tax (AMT) liability. In addition, a start-up company with less than $5 million in gross receipts may claim the credit against up to $250,000 in employer Federal Insurance Contributions Act (FICA) taxes.
READ MORE: The R&D Tax Credit: A Great Tax Planning Tool
Issue more stock: Does your business need an influx of capital? If so, consider issuing qualified small business stock (QSBS). As long as certain requirements are met (for example, at least 80% of your corporate assets must be actively used for business purposes) and the investor holds the stock for at least five years, 100% of the gain from a subsequent sale of QSBS will be tax-free to the investor — making such stock an attractive investment opportunity. The PATH Act lifted the QSBS acquisition deadline (December 31, 2014) for this tax break, essentially making the break permanent.
Hire workers from certain "target groups": Your business may claim the Work Opportunity credit for hiring a worker from one of several "target groups," such as food stamp recipients and certain veterans. The PATH Act revives the credit and extends it through 2019. It also adds a new category: long-term unemployment recipients.
Generally, the maximum Work Opportunity credit is $2,400 per worker, but it's higher for workers from certain target groups. In addition, an employer may qualify for a special credit, with a maximum of up to $1,200 per worker for 2016, for employing disadvantaged youths from Empowerment Zones or Enterprise Communities in the summer.
New transitional rules give an employer until June 30, 2016, to claim the Work Opportunity credit for applicable wages paid in 2015.
READ MORE: The Many Benefits of the Work Opportunity Tax Credit
We're almost half way through the tax year. Summer is a great time for businesses to get a jump start on tax planning.
Contact us at info@concannonmiller.com or 610-433-5501 to estimate your expected tax liability based on year-to-date taxable income and devise ways to reduce your tax bill in 2016 and beyond.
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