January 19, 2016
A Deeper Look into the 2015 Tax Extenders
2015 Tax Extenders
On December 18, 2015, President Obama signed the Consolidated Appropriations Act 2016, which included significant federal tax provisions under the Protecting Americans from Tax Hikes Act of 2015 (“The Act”). With The Act, certain significant tax incentives set to expire were extended or made permanent. The below discusses relevant highlights included in The Act.
The Act permanently extends the $500,000 limitation on expensing certain depreciable property under Section 179. This applies retroactively to eligible property placed in service on January 1, 2015 and after. The amount of available Section 179 deduction is reduced when a taxpayer’s total investment in eligible property exceeds $2 million in a tax year. Section 179 deductions for computer software and up to $250,000 in qualified leasehold improvement property, qualified retail improvements, and qualified restaurant property were also made permanent. The $250,000 limitation (above) is removed, effective with a taxpayer’s first tax year beginning in calendar year 2016. Therefore, such qualified property (like any other Section 179 property) will only be subject to the aggregate $500,000 limitation going forward.
Prior to The Act, building improvements placed in service after December 31, 2014 were not eligible for a 15-year recovery period. Instead, a 39-year straight-line method was required for such property. The Act retroactively and permanently restores the availability of the 15-year recovery period for qualified leasehold improvement property, qualified retail improvement property and qualified restaurant property placed in service after December 31, 2014.
The Act also temporarily extends, for five years, the 50% bonus depreciation deduction on qualified depreciable property placed in service during the tax year. The deduction, however, is reduced to 40% for property placed in service during 2018 and further reduced to 30% in 2019. Beginning in 2016, the treatment of qualified leasehold improvements will be modified. Under The Act a new category of qualified property (i.e. qualified improvement property) will replace the old category (i.e. qualified leasehold improvement property). The new category is broader than the old and improvements to the interior portion of a building will be qualified for bonus depreciation regardless of whether it is an improvement to a leasehold in the building.
Taxpayers should continue to consider these taxpayer-friendly depreciation provisions in their tax planning.
Research & Development Credit
The Act retroactively and permanently reinstates the R&D credit for qualified research expenses incurred January 1, 2015 and thereafter. The method in calculating the credit remains unchanged, however, notable additional incentives of the credit now includes the option for certain small businesses to offset their alternative minimum tax (“AMT”) with the credit and the option for certain small start-ups to elect to offset up to $250,000 of the credit against their payroll tax liability in-lieu of their income tax liability.
The Act not only provides taxpayers with the future certainty of the credit, but also further incentivizes the credit for qualified small businesses.
Qualified Small Business Stock
Under prior law and subject to limitations, certain non-corporate shareholders of Qualified Small Business Stock (“QSBS”) may exclude up to 100% of gain realized on the sale of such stock. This was a temporary provision which began in 2010. Previously, the exclusion had been generally 50% of gain, however, The Act made permanent the 100% exclusion. The Act also permanently removes the required AMT adjustment (i.e. subjecting the gain to AMT) on the amount excluded. Therefore, going forward, qualified gains under this provision should not be subject to regular tax or AMT.
Among other requirements, in order to qualify as QSBS the gross assets of the corporation, at all times, cannot exceed $50 million and the stock must be held for more than 5 years.
With far more certainty that this exclusion will persist indefinitely, coupled with the removal of the AMT preference item, this presents a very attractive planning opportunity for many small businesses.
S-Corporation Built-In Gains Tax Recognition Period
The Act permanently reduces the built-in gain (“BIG”) recognition period for S-Corps from ten years to a five year period. In general, the BIG tax could affect S-Corps which were formerly C-Corps and hold BIG assets.
As with the QSBS exclusion, above, this may provide certain S-Corp shareholders far more assurance when implementing tax planning strategies.
Extension of the Work Opportunity Credit for Employers
The Act temporarily extends the Work Opportunity Credit for five years through 2019. The credit may be available for employers who pay wages to certain first-year employees. In addition, beginning in 2016, the credit is modified under The Act to apply for employers who hire qualified long-term unemployed individuals and increases the credit on such individuals to 50% of the first $6,000 of wages. “Qualified long-term unemployed individuals” are defined as those individuals who have been unemployed for 27 consecutive weeks or more and have received federal or state unemployment compensation for a portion of that period.
Excise Tax on Medical Devices
The Act also suspends, for two years, two new taxes that were installed as part of the health care reform law: (1) the excise tax on medical devices (which was effective for sales after Dec. 31, 2012) won't apply to sales made January 1, 2016 through December 31, 2017; and (2) the 40% excise tax on high-end health insurance plans, known as the “Cadillac tax,” which would have applied beginning in 2018, will instead apply, effective January 1, 2020.
Unlike other proposed legislation to repeal the medical device excise tax, The Act does not provide for a refund of excise tax for sales made prior to January 1, 2016. It is possible that Congress may attempt to further extend this relief or permanently repeal the tax in the future.
If you have any questions regarding the information in this article, please reach out to Chris Colyer, Tax Partner at firstname.lastname@example.org or 973.994.9400.