For many years, business tax planning has been a frustrating exercise as a number of popular tax breaks commonly known as “extenders” would expire, only to be retroactively extended in December of the subsequent year.
Businesses would go the entire year not knowing whether Congress would extend these tax breaks or not. As you can imagine, it becomes very difficult to do any tax planning with this kind of uncertainty.
But to everyone’s surprise in December 2015, Congress permanently extended a number of these popular tax breaks while others were extended for two to four years. With the uncertainty gone, tax planning in 2016 is now much easier.
Smart Business spoke with Richard J. Nelson, Director, Tax Strategies at Kreischer Miller about the tax planning opportunities that are available to businesses in 2016.
How will these tax breaks help businesses?
One of the permanently extended provisions was the Research and Development (R&D) credit. The R&D credit is a popular tax break used to encourage businesses to research and develop new products, methodologies and in some cases, the development of computer software.
In addition to the extension, Congress also included two new provisions allowing eligible small businesses with $50 million or less in average gross receipts to apply the credit against the alternative minimum tax, while startup companies with less than $5 million of gross receipts can elect to use the credit against payroll taxes.
Another permanent extension was the Section 179 expense deduction. The 179 expense was enacted to encourage businesses to invest in equipment. The deduction allows taxpayers to immediately expense up to $500,000 in equipment purchases. This amount begins to phase out once equipment purchases for the year exceed $2.01 million.
Along those same lines, another important provision was the extension of bonus depreciation. For 2016, taxpayers can deduct up to 50 percent of the adjusted basis of qualified property in the first year it is placed in service.
Qualified property includes new property, off-the-shelf computer software and qualified leasehold improvements. Other depreciation provisions allow a 15-year, straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements and qualified retail improvements.
The use of the Section 179 deduction, the 50 percent first-year bonus depreciation and regular depreciation can provide significant tax savings to any business with taxable income.
For 2016, the work opportunity credit has been extended and expanded. The credit is equal to 40 percent of the first $6,000 of qualified first-year wages of employees who are members of a targeted group. There are a number of targeted groups, with the most common being veterans and ex-felons. The targeted groups were expanded in 2016 to include qualified individuals who have been unemployed for 27 or more weeks.
What about the provision affecting C Corporations that have converted to S Corporations?
A significant change is the reduction of the built-in gain period from 10 years to five years. Generally, the built-in gains tax is a corporate level tax on the gains inherent in the assets at the time of the conversion. If you can manage your profit through those first five years and you do not sell the assets during that period, you may escape paying the corporate level tax on the inherent gain.
If you are a business owner and your company has a 401(k) plan, it is a good idea to maximize your plan contributions to get the deduction and the income deferral. If your plan does not contain provisions for a Roth 401(k), you should consider changing your plan.
The main difference between the regular and Roth 401(k) is the deductibility of the contributions and the taxation of the distributions. With a regular 401(k), contributions are tax deductible and distributions (both contributions and any income earned) are taxed as ordinary income. With a Roth 401(k), contributions are not tax deductible.
But all distributions, including the income earned, are not taxed. You would need to speak with your plan advisor about a Roth 401(k). ●
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