By John T. Hewitt
For the last several years, business owners have had to play a wait-and-see game with Congress and the President when it came to certain tax breaks. The PATH Act put an end to that game by extending, in some cases permanently, several tax incentives for individuals and businesses. The extensions allow business owners to plan for tax breaks for which they are eligible, and incorporate those breaks into their business planning, especially when it comes to big equipment purchases and hiring employees. Here’s a look at five things the PATH Act can help your business accomplish.
1. Make Equipment Purchases
That new computer will work even better for your business if you can write the purchase price off in one tax year instead of five. Not actually, but it sure would be nice to be able to take the full deduction in one year. That’s what Section 179 expensing allows. Under the PATH Act, the deduction at the $500,000 level was made permanent. So, let’s say that computer and software cost $5,000. Instead of using regular depreciation, which would allow small deductions over a period of five years, your business can take the full $5,000 in the first year as long as the computer and software are placed into service in the tax year and are used more than 50 percent of the time for business. Section 179 is valid for new or used equipment. The deduction limit starts to phase out when qualified property placed in service during the year is more than $2 million. Both deduction amount and limit will be adjusted for inflation starting in 2016 ($2,010,000 is the phase out amount for tax year 2016).
2. Get Another Depreciation Deduction on that Equipment
Another useful business tool, bonus depreciation allows a business to deduct 50 percent of its costs for new capital equipment in the year in which it was purchased, instead of over several years. Bonus depreciation can be used after you’ve taken the Section 179 deduction and in addition to the standard depreciation deduction. Bonus depreciation has a limited shelf life under the PATH Act. It drops to 40 percent in 2018 and 30 percent in 2019. In 2020, the deduction is set to expire completely.
3. Hire Employees
Business is going well, and you want to add a few new employees. Great. If you hire workers in certain categories, you may be eligible for the Work Opportunity Tax Credit. The credit was created as an incentive for business owners to hire military veterans and others. It gives you a tax break when you hire such employees. The PATH Act extended the credit through 2019 and added a 40 percent credit up to the first $6,000 in wages for employers who hire qualified long-term unemployed individuals who have been out of work for 27 weeks or more. Several states also offer tax credits for businesses that hire these workers.
4. Do Research and Development
Product development and improvement can be costly but beneficial. The Research and Development Tax Credit recognizes those facts and seeks to help businesses recover some of the costs, including the expenditures of obtaining a patent, such as attorney’s fees. The PATH Act permanently extends the credit, and, starting in 2016, eligible small business with $50 million or less in gross receipts can claim the credit against alternative minimum tax (AMT) liability.
5. More Quickly Recover Basis of Certain Types of Property
The PATH Act permanently extended the 15-year recovery period for qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property. This allows business owners to more quickly recover the basis of property placed into service after 2014, because it can be treated as 15-year property rather than 39-year property.
Along with tax breaks for your business, the PATH Act includes several tax credits and deductions that may apply to your home life, including breaks for college tuition, state and local sales tax and tax-free distributions from IRAs to charities. Take time to review that new law with your tax preparer to ensure that you and your business get all the tax credits and deductions for which you are eligible.
John T. Hewitt is the CEO and founder of Liberty Tax Service and SiempreTax+, a leading tax preparation franchise with more than 4,400 locations in the United States and Canada. Mr. Hewitt is also the author of “iCompete: How My Extraordinary Strategy for Success Can Be Yours.”