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Congressional Budget Agreement Means Tax-Saving Opportunities for Businesses

December 18, 2015

Michael P. Jodon, CPA
Partner

Now that Congress has reached an agreement on a variety of key tax provisions, once President Obama signs them into law, it should mean a number of beneficial tax deduction extenders are available to businesses if they choose to take advantage of them. In particular, here are five key provisions that could provide businesses with opportunities for tax savings.

Extension and modification of increased expensing limitations and treatment of certain real property as Section 179 property (Section 124)

This provision permanently extends the small business expensing limitation and phase-out amounts in effect from 2010 to 2014 ($500,000 and $2 million, respectively). These amounts are currently $25,000 and $200,000, respectively. The special rules that allow expensing for computer software and qualified real property (qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property) are also permanently extended. The provision modifies the expensing limitation by indexing both the $500,000 and $2 million limits for inflation beginning in 2016, and by treating air conditioning and heating units placed in service in tax years beginning after 2015 as eligible for expensing. The provision further modifies the expensing limitation with respect to qualified real property by eliminating the $250,000 cap beginning in 2016.

For those businesses with major capital expenses or technology upgrades, this could prove to be a valuable deduction.

Extension and modification of bonus depreciation (Section 143)

This provision extends bonus depreciation for property acquired and placed in service between 2015 and 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 phases down, with 40 percent in 2018 and 30 percent in 2019. The provision continues to allow taxpayers to elect to accelerate the use of AMT credits in lieu of bonus depreciation under special rules for property placed in service during 2015. The provision modifies the AMT rules beginning in 2016 by increasing the amount of unused AMT credits that may be claimed in lieu of bonus depreciation. The provision also modifies bonus depreciation to include qualified improvement property and to permit certain trees, vines and plants bearing fruit or nuts to be eligible for bonus depreciation when planted or grafted, rather than when placed in service.

This is an additional benefit for taxpayers with capital expenses in which section 179 might not provide a benefit.

Extension of reduction in S corporation recognition period for built-in gains tax (Section 127)

This provision permanently extends the rule reducing to five years (rather than 10 years) the period for which an S corporation must hold its assets following conversion from a C corporation to avoid the tax on built-in gains.

Extension and modification of research credit (Section 121)

This provision permanently extends the research and development (R&D) tax credit. Additionally, beginning in 2016, eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax (AMT) liability, and the credit can be utilized by certain small businesses against the employer’s payroll tax (i.e., FICA) liability.

For those in the manufacturing and technology sector who depend on a robust R&D climate to enhance their businesses, this part of the agreement could provide invaluable assistance.

Extension and modification of work opportunity tax credit (Section 142)

This provision extends the work opportunity tax credit through 2019. The provision also modifies the credit beginning in 2016 to apply to employers who hire qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more) and increases the credit with respect to such long-term unemployed individuals to 40 percent of the first $6,000 of wages.

 

Michael P. Jodon, CPA, is a tax partner with BlumShapiro, the largest regional business advisory firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island. The firm, with over 400 professionals and staff, offers a diversity of services, which includes auditing, accounting, tax and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services, such as succession and estate planning, business technology services, employee benefit plan audits, litigation support and valuation.  The firm serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein.  Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities.  This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

 

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