2015 Business Tax Highlights and the Protecting Americans from Tax Hikes Act of 2015 (PATH)
Darrell Layman CPA
January 9, 2016
This year saw numerous tax developments that affect businesses, many of which deserve special scrutiny for year-end planning in an effort to minimize your 2015 tax bill.
As a year-end holiday gift, Congress gave taxpayers the Protecting Americans from Tax Hikes Act of 2015 (PATH), which was passed by Congress and signed by the President on December 18. As part of a broad budget deal, PATH permanently extends many tax provisions that previously had been up for renewal for one or two years at a time and temporarily extends dozens of others for periods ranging from two to five years.
Section 179 Deduction Made Permanent
One of the more noteworthy provisions for businesses is the permanent extension of the small business Code Sec. 179 expensing limitation.
For tax years beginning in 2015, you can now expense up to $500,000 of qualified property placed into service by December 31. Had this tax break not been extended, the maximum amount you could expense for 2015 would have been $25,000. Note that the total amount of property that you can place into service before having to reduce your Section 179 deduction is $2,000,000. In addition, both the $500,000 and $2 million limits are indexed for inflation beginning in 2016.
The amounts that may be expensed can include up to $250,000 of the cost of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. This cap will be eliminated beginning in 2016.
Bonus Depreciation Extended Through 2019
As you know, businesses can recover the cost of capital expenditures over time through depreciation. In 2014, you were entitled to a 50 percent bonus depreciation deduction for assets placed in service that year. PATH extends bonus depreciation for property acquired and placed in service during 2015 through 2019 (with an additional year for certain property with a longer production period). The bonus depreciation percentage is 50 percent for property placed in service during 2015, 2016, and 2017, and is phased down to 40 percent in 2018, and 30 percent in 2019.
PATH also allows you to elect to accelerate the use of AMT credits in lieu of taking the bonus depreciation.
Retroactive 2014 Bonus Depreciation
The IRS has recently issued guidance on how fiscal year taxpayers can retroactively elect to take the 50-percent bonus depreciation deduction for qualified property placed in service during the 2014 portion of fiscal years beginning in 2013. The guidance, which additionally addresses carrying over disallowed Code Sec. 179 deductions for qualified real property, applies to taxpayers who filed their 2013 returns (or 2014 short year returns) before enactment of last year's tax extenders bill on December 19, 2014. If you are eligible, we should meet to discuss the possibility of electing the retroactive bonus depreciation.
Research Tax Credit Made Permanent
PATH has permanently extended the popular research tax credit, retroactive for 2015. Additionally, beginning in 2016, small businesses may claim the credit against alternative minimum tax (AMT) liability, and this credit can be utilized by certain qualifying startup businesses against the employer's payroll tax liability.
And, it is worth noting that two taxpayer-favorable court cases rejected IRS attempts to rein in taxpayers' ability to take full advantage of this credit. If you've taken research tax credits in the past couple of years, it may be worthwhile to review the calculation of those credits in light of these cases to see if additional expenses can be claimed based on the court holdings.
Vehicle Deductions and Substantiation
Expenses relating to vehicles used in a business can add up to major deductions. The deductible vehicle expenses of a business are generally calculated using one of two methods: the standard mileage rate method or the actual expense method. If the standard mileage rate is used, parking fees and tolls incurred for business purposes can be added to the total amount calculated. The standard mileage rate for business mileage is 54 cents for 2016 and 57.5 cents for 2015.
Since the IRS tends to focus on vehicle expenses in an audit and disallow them if they are not property substantiated, you should ensure that the following are part of your tax records with respect to each vehicle used in your business: (1) the amount of each separate expense with respect to the vehicle (e.g., the cost of purchase or lease, the cost of repairs and maintenance); (2) the amount of mileage for each business or investment use and the total miles for the tax period; (3) the date of the expenditure; and (4) the business purpose for the expenditure. The following are considered adequate for substantiating such expenses: (1) records such as an account book, diary, log, statement of expense, or trip sheets; and (2) documentary evidence such as receipts, canceled checks, bills, or similar evidence.
Records such as an account book, diary, log, statement of expense, or trip sheet are considered adequate to substantiate the element of an expense only if the records are prepared or maintained in such a manner that each recording of an element of the expense is made at or near the time the expense is incurred.
Permanent Extension of Mass Transit Benefits
PATH has permanently extended, retroactive for 2015, the $175 monthly exclusion from income for employer-provided transit and vanpool benefits. Thus, the exclusion for such benefits is the same as the exclusion for employer-provided parking benefits. While such benefits are not includible in the employee's income on Form W-2, they are deductible by employers as fringe benefits.
S Shareholder Salaries
The IRS is scrutinizing the reporting of salaries of S corporation shareholder-employees. Some S shareholders prefer to take money out of an S corporation as a distribution rather than a salary on which employment taxes must be paid. The IRS has been going after such shareholders. Thus, if you are actively involved in an S corporation, you must be paid a "reasonable compensation" for your services. The key to establishing reasonable compensation is determining what type of work you did for the S corporation as an employee-shareholder. If you are in this situation, we need to document the factors that support the salary you are being paid.
While your business is not required to have a retirement plan, you may want to consider adding one. By starting a retirement savings plan, you not only help your employees save for the future but also attract and retain qualified employees. Such plans offer tax savings to your business because employer contributions are deductible from the business's income. Additionally, a tax credit is available to small employers for the costs of starting a retirement plan. Please let me know if this is an option you would like to discuss further.
Changes Made to Tax Return Due Dates
A new law changed the due date for partnership and C corporation tax returns. It also extended the automatic extension for corporate income tax returns from three to six months. The changes generally apply to tax years beginning after 2015.
The due date for partnership returns has been moved up to coincide with the due date of S corporation returns. Thus, partnership returns are now due by the 15th day of the third month after the close of the partnership tax year. The change is meant to help individual partner's avoid having to file an extension because partnership K-1s don't generally arrive until after the April 15 due date for individual tax returns.
The due date for filing a C corporation return has been changed from the 15th day of the third month (i.e., March 15 for a calendar year corporation) to the 15th day of the fourth month (i.e., April 15 for a calendar year corporation). However, there is an exception for C corporations with a June 30 fiscal year. The due date for filing a June 30 C corporation return remains the 15th day of the third month following the end of the year (i.e., September 15) for the next 10 years. All other changes are effective for tax years beginning after 2015.
Overstating Basis of Property Sold Can Extend Statute of Limitations
The same new law overrides a Supreme Court decision that was favorable to taxpayers. The new law extends the statute of limitations from three years to six years in cases where a taxpayer overstates the basis in property sold and thus understates the gain on the sale. The change applies to (1) returns filed after July 31, 2015, and (2) returns filed on or before July 31 if the statute of limitations (determined without regard to the change) for assessment of the taxes with respect to which such return relates has not expired as of such date.
Contracts Involving Regular Performance of Services
A new safe harbor is available for accrual method taxpayers who have contracts under which services are provided to them on a regular basis (for example, contracts for janitorial or I.T. services). Under the safe harbor, a taxpayer can potentially accelerate deductions related to the cost of such services in situations where the services are either recurring in nature or are expected to be performed within 3 1/2 months of the end of the tax year.
If you have contracts with service providers who perform regular and routine services that might qualify for the safe harbor, we should discuss the possibility of making an accounting method change in order to take advantage of the accelerated write-offs.
Additional Tax Breaks Extended by the Protecting Americans from Tax Hikes Act of 2015
In addition to major changes, such as making permanent the increased Section 179 expensing amounts (discussed earlier), the Protecting Americans from Tax Hikes Act of 2015 also extended numerous other tax breaks, including the following:
(1) The work opportunity tax credit is extended through 2019.
(2) The new markets tax credit is extended through 2019.
(3) Accelerated depreciation for qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property is permanently extended.
(4) The classification, for depreciation purposes, of certain race horses as three-year property is extended through 2016.
(5) The classification, for depreciation purposes, of motorsports entertainment complexes as seven-year property is extended through 2016.
(6) The expensing allowance for certain film and television productions and the cost of live theatrical productions is available through 2016.
(7) The tax rule exempting dividends, interest, rents, and royalties received or accrued from certain controlled foreign corporations by a related entity from treatment as foreign holding company income is extended through 2019.
(8) The employer wage credit for employees called to active military duty is permanently extended and, beginning in 2016, will apply to employers of any size.
(9) The 100 percent exclusion from gross income of gain from the sale of small business stock is permanently extended.
(10) The deduction allowable with respect to income attributable to domestic production activities in Puerto Rico is extended through 2016.
(11) Empowerment zone tax incentives have been extended through 2016.
Please call me at if you have any questions regarding the impact on your business's tax situation.