2016 Brings Good News on Taxes for Small Businesses
While we were all trying to wind down from work and focus on the holidays, Congress, in its traditional year-end frenzy, passed some significant legislation. A $1.1 trillion budget bill and $620 billion tax bill were signed into law. Several provisions of the Protecting Americans from Tax Hikes (PATH) Act will benefit small businesses. Here are five of note:
1) R&D Tax Credit: The bill permanently extends the research tax credit. Small businesses ($50 million or less in gross receipts) may claim the credit against their AMT liability and in some cases against their payroll tax liability. The PATH Act also makes permanent the alternative simplified credit at 14 percent.
2) Leasehold Improvements: The bill also permanently extends the 15-year cost recovery for leasehold improvements, qualified restaurant property and qualified retail improvements.
3) Bonus Depreciation: This is a 5-year provision that extends bonus depreciation for property acquired and placed into service during 2015 through 2019. The bonus depreciation percentages are 50% for 2015-2017, 40% for 2018, and 30% in 2019. The Act allows and modifies the use of AMT credits in lieu of bonus depreciation.
4) Section 179 Expensing: The law permanently extends the small business expensing for certain business assets. The limits are $500,000 and $2 million, indexed for inflation starting in 2016. For qualified real property, the $250,000 cap is eliminated in 2016.
5) Small Business Stock: The Act extends the 100% exclusion on gains from the sale of small business stock held for more than five years and acquired before 2017.
Typical of tax bills, the PATH Act has a slew of provisions — the summary is 20 pages. But the good news is that by making several temporary tax breaks permanent, not only can small businesses better plan, but the tax committees in Congress can also spend more time focused on real tax code reform and simplification. The Chairman of the Ways and Means Committee has said that with the tax extenders off the table, “good tax policy is going to blossom, and we’re going to have a chance to give [tax reform] oxygen over 2016 and 2017.” He has a one-, two- and four-year strategy. First up, a push for international tax reform and a lower corporate rate to something like 20%. The Chairman has said he won’t leave small businesses paying as individuals and pass-through entities behind, “I want to make sure small businesses don’t pay higher rates than larger businesses, and I want every size business to be competitive again.”
Presidential election years aren’t typically legislatively productive, but even if the path to tax overhaul is a long one, at least the PATH Act has given small businesses some degree of certainty to map out their investments.