July 18, 2016 § Leave a comment
If you’re like me, you are probably wondering where the summer has gone. Baseball season is over for many of our kids, we’re past the 4th of July celebrations and back-to-school preparations are in the near future. As business owners, many of us are half way through our fiscal year operations. This is good news in many cases as we can reflect on the past 6 months of operations and look forward to what’s ahead. Planning is a key to any business success, and focusing on planning all year long can provide many opportunities to review and refine your annual goals.
On the minds of most business owners is planning for taxes. Most people get a sick feeling in their stomach when the word “taxes” is even brought up, but planning can ease their pain or at least help them understand and plan for this business expense. Uncertainty has always played a role in tax planning for individuals and businesses as they look to the future. Typically, taxpayers are scrambling to see what Congress is going to do in late December that impacts them for that entire year.
On December 18, 2015, Congress passed the PATH Act, which retroactively extended many expired tax provisions back to the beginning of 2015 along with making over 20 key tax provisions permanent into the future. The history by Congress to give taxpayers 2 weeks to plan for an entire year has been difficult to put it mildly. This unexpected certainty in the tax law (although never guaranteed) is welcoming and comforting for taxpayers as they plan for 2016 and know their options.
Individual Tax Update
The PATH Act permanently extends the following for individuals:
- State and Local Sales Tax Deduction – this provision allows you to claim an itemized deduction for state and local general sales taxes, but only in place of deducting state and local income taxes as an itemized deduction. Unfortunately, for most Iowa residents, the sales tax deduction is generally smaller than the state and local income tax deduction, but always worth looking into when major purchases are done during the year.
- American Opportunity Tax Credit – making this extender permanent has been great news for all those parents with college age students. The credit allows for up to $2,500 against your federal tax liability if your AGI is below certain thresholds.
- Teachers’ Deduction – this $250 deduction has been around for some time, but now is permanently extended. New for 2016, the deduction includes professional development expenses incurred by teachers, such as courses related to the curriculum taught by the teacher. Now if we can just work on that $250 amount as I speak for most teachers out there, that expense typically doesn’t even touch the surface of expenses paid by them for their profession.
- Charitable Distributions from IRAs – individuals age 70 ½ and older can continue to take advantage of making tax-free distributions from their IRA to a qualified charity and counting it towards their RMD up to $100,000 per taxpayer each year.
Provisions that are currently set to expire at the end of 2016 include:
- Qualified Tuition Deduction
- Mortgage Debt Exclusion
- Mortgage Insurance Premium Deduction
Business Tax Update
The PATH Act permanently extends the following for businesses:
- Section 179 Deduction – One of the most significant impacts to small businesses, the permanent setting of the 179 deduction provides a major benefit to those industries that make significant equipment purchases. The law permanently sets the 179 limit at $500,000 with a $2 million purchase limit before it begins to phase-out. For real estate owners, the 179 expense for qualified real property was made permanent and the previous limit of $250,000 was removed beginning in 2016.
- R&D Tax Credit – Finally the R&D credit, which has a history of expiring and being retroactively extended is now made permanent. As an added bonus, qualified small businesses can claim the credit against AMT, and qualified startups can claim a portion of the credit against their employer FICA payroll tax liability.
- S Corp Built-In Gains Tax – Those owners of C Corporations who are looking to sell their business in the next 6-10 years may be able to take advantage of converting their C Corporation to an S Corporation and avoid the double taxation. The built-in gains tax was a deterrent to converting and used to be a 10 year recognition period. That period is now made permanent at 5 years.
- 15 Year Depreciation – Qualified leasehold improvements, restaurant property and retail improvements can continue to enjoy the reduced 15 year write-off of these costs if they qualify.
Tax Provisions that were extended for 5 years and are available through 2019:
- Bonus Depreciation – Bonus depreciation has been around for many years in various forms and applies to new (not used) qualifying assets placed in service during the year. For tax years 2016-2017, the amount is 50% of the asset cost, then reduces to 40% in 2018 and 30% in 2019. In addition beginning in 2016, an added “Bonus” to real estate, qualified improvement property is 39 year depreciable property but eligible for bonus depreciation. Qualified Improvement Property is any building improvement to an interior portion of the building that is nonresidential property if the improvement is placed in service after the date the building was first placed in service. It does not include expenses attributable to the enlargement of a building, any elevator or escalator or the internal structural framework of a building.
- Work Opportunity Tax Credit – this provision was enhanced for employers that hire certain long-term unemployed individuals. Be aware there are specific time limits on when credits can be applied for. It’s always good practice to have these procedures in place as part of your hiring process.
There were several other items that were impacted by the tax update, including energy incentives, ACA updates and more. One important item to consider as you develop your tax strategy is the impact of state income taxes. Currently, the above extenders are not adopted in Iowa for 2016. This can have a significant impact to taxpayers as they plan for the year. Iowa delayed their adoption of the 2015 IRS tax changes until late March of 2016, which did not include bonus depreciation. There is concern that Iowa will not continue to adopt these changes that the federal government has implemented, so careful consideration should be done when analyzing your options.
Taxpayers should take advantage of the current laws in place and begin implementing specific tax strategies now to maximize benefits, rather than waiting until the end of the year. Taxpayers should consider several “what if” scenarios over a number of tax years to determine any benefits that can be used based on the above items. Careful consideration to cash flow planning needs to be reviewed and incorporated in the planning process. Businesses and individuals need to plan out their tax strategy so that it is in line with their business goals. These types of decisions need to be reviewed by business owners, with their MHC&S trusted advisor, for pros and cons to determine the best approach for their company. Contact MHC&S to get started on developing and implementing your tax strategy today!
David Farnsworth, CPA
Co-Managing Partner – McGowen, Hurst, Clark & Smith, P.C.