Lawmakers waited until late in the year, but finally passed a major tax bill that extended more than 50 tax provisions, some of which stand to benefit service centers and other small-business owners. In the past, Congress typically has passed temporary measures, extending tax benefits for just a year or two. Under the new Protecting Americans from Tax Hikes (PATH) Act of 2015, the provisions are retroactive with many made permanent, promising to save taxpayers an estimated $622 billion.
The act delays for two years the so-called “Cadillac” tax on the high-cost health insurance plans so many business owners provide themselves and key employees, from 2018 to 2020. Also extended by PATH are many of the tax-favored investment incentives employed by companies to attract badly needed capital, such as the New Markets tax credit and Empowerment Zone tax incentives. But the big deal for many will be the permanent extension of the Section 179 small business expensing deduction.
The so-called “Section 179” deduction allows service centers and other companies to take an up-front expense deduction for the entire cost of equipment ranging from computers to lift trucks to vehicles and machinery. The amount allowed as a write-off in the first year, instead of slowly deducting or depreciating over several years, is now permanently fixed at $500,000 per year, phased out dollar-for-dollar as expenditures begin to exceed $2 million in a year.
PATH also treats air conditioning and heating units placed in service after 2015 as eligible for Section 179 expensing. And, in an unusual move, lawmakers will allow these amounts to be adjusted for inflation beginning in the 2016 tax year. Finally, service center executives will have the certainty necessary to plan for and make needed capital investments.
A bonus write-off
Originally created as a short-term stimulus measure, bonus depreciation is back, albeit phased out over a five-year period. Bonus depreciation, which permits the immediate deduction of any business equipment expenses rather than a depreciated tax write-off over time, has been extended at the former 50 percent rate for the 2015-2017 tax years, phased down to 40 percent in 2018 and 30 percent in 2019. Making it even semi-permanent will help businesses that spend heavily on equipment, machinery or other business property to reap large up-front tax breaks. In fact, overall tax savings are predicted to be $281 billion over a 10-year period.
Many metals distributors will find that the bonus depreciation break may be more valuable than the Section 179 deduction because the Section 179 expensing deduction is limited to the taxable income of the business. Although losses produced by both a Section 179 first-year expensing deduction and bonus depreciation can be carried forward, only losses generated by the 50 percent bonus depreciation can be used to offset other income. They can also be carried back for two years, thereby generating a refund from Uncle Sam. Energy-efficient commercial buildings
A provision in PATH extends through the 2016 tax year the above-the-line deduction for the cost of improvements made to commercial buildings to make them energy efficient. Companies can get tax deductions for improvements to either new or renovated buildings that save 50 percent or more of a building’s projected annual energy costs. Improvements made for heating, cooling and lighting are compared to model national standards. Partial deductions for efficiency improvements to individual lighting, HVAC and water heating or envelope systems are also available.
A tax deduction of up to $1.80 per square foot is available to owners or tenants of new or existing commercial buildings that are constructed or reconstructed to save at least 50 percent of their heating, cooling, ventilation, water heating and interior lighting energy costs. A partial deduction of 60 cents per square foot can be taken for improvements made to one of three building systems—the building envelope, lighting or heating, and the cooling system. Of course, the partial building improvement must reduce total heating, cooling, ventilation, water heating and interior lighting energy use by 16 2/3 percent (16 2/3 percent is the 50 percent goal of the three systems spread equally). Energy-efficient fleets
The provision for installing non-hydrogen alternative fuel vehicle refueling “property” has been extended through 2016. Under the current law, hydrogen-related property is already eligible for the credit through 2016. A service center is now allowed a tax credit of up to 30 percent of the cost of the installation of the qualified alternative fuel vehicle refueling property.
The existing $1.00 per gallon tax credit for biodiesel and biodiesel mixtures also has been extended through 2016, as has the 50 cents per gallon tax credit for alternative fuels and alternative fuel mixtures used in a service center’s vehicles.
And don’t forget the credit for purchasing qualifying new fuel cell motor vehicles. It, too, has been extended through the 2016 tax year. The new extended rules provide a tax credit of between $4,000 and $40,000, depending on the weight of the vehicle, available upon the purchase of such vehicles.
Work Opportunity Tax Credit
PATH extended and greatly expanded the Work Opportunity Tax Credit, which is available to employers through 2019 for hiring members of certain targeted groups that have consistently faced barriers to employment. The WOTC is a percentage of a qualified worker’s first-year wages of up to $6,000 per employee, or $3,000 for qualified summer youth employees. In situations where the employee is a recipient of long-term family assistance, the WOTC is a percentage of first- and second-year wages up to $10,000 per employee.
While the maximum WOTC for a service center hiring a qualifying veteran generally is also $6,000, it can be as high as $12,000, $14,000 or $24,000 depending on factors such as whether the veteran has a service-connected disability, the period of his or her unemployment before being hired, and when that period of unemployment occurred.
The credit also applies to employers who hire individuals who have been unemployed for 27 weeks or more. The credit for employing such long-term unemployed individuals who began work after Dec. 31, 2015, is 40 percent of the first $6,000 of wages.
The built-in gains of S corporations
As the economy improves, many service centers will replace old equipment and other business assets. Unfortunately, although S corporations are not usually taxed, instead passing on income and losses to shareholders, many are discovering that a corporate-level tax is being imposed at the highest marginal rate of 35 percent on the so-called “built-in gain” of a business operating as an S corporation. That built-in gain usually arises from the sale of assets prior to the company’s conversion from a regular C corporation to an S corporation. PATH retroactively and permanently mandates that when determining the net recognized built-in gain, the recognition period is five years, the same period that applied to tax years beginning in 2014.
In other words, the built-in capital gains of a corporation that has become an S corporation must be held for five years in order to avoid the higher conversion capital gains tax. Permanently reducing the S corporation recognition period for the built-in gains will make it easier for incorporated businesses to become Subchapter S corporations and more fluidly change the status of their business entity to respond to changing market conditions. Small business stock, and more
Many incorporated businesses, start-up or existing, use a special “small business stock” to finance the growth of their operations. The 100 percent exclusion from capital gain that was allowed on the sale or exchange of qualified small business stock held for more than five years by non-corporate investors has been extended. Also, the much-talked-about but often ignored research and development tax credit has been permanently extended and can now be used to offset the alternative minimum tax liability of a metals business or to reduce the employer’s payroll tax liability.
The complexity of the PATH Act, and the fact that many of its provisions apply to transactions that occurred in 2015, makes professional tax assistance almost mandatory for companies that want to reap all the benefits they are entitled to in the years ahead.