December 22, 2016 – There are several strategies that businesses should consider in order to maximize tax benefits while year-end planning for 2016. Some of the strategies that should be considered involve the following tax topics:
- Code Section 179 expensing
- Research Credit
- Bonus Depreciation and Revised Repair Regulation Rules
- Remodel/Refresh Regulation
By strategically planning, businesses may be able to use the laws and regulations listed above to maximize their total tax benefit.
Code Section 179
Through the Protecting Americans from Tax Hikes (PATH) Act, Section 179 expense has been permanently set at a maximum expense of $500,000 with a $200 million investment phase out. These amounts will be adjusted for inflation in years ending after December 31, 2015.
Businesses should consider the possible tax benefits of using Section 179 expense versus bonus depreciation for qualified assets. It should be recognized that Section 179 expense is not only available to new property acquired, but also second hand property and equipment. This is not the case for bonus depreciation. By determining which qualified assets are to be expensed through Section 179 and bonus depreciation, businesses will be able to receive the maximum benefit for the current tax year, as well as future years.
Businesses should recognize the fact that year-end purchases are qualified for Section 179 expense. There is no need to prorate a reduction in the expense based on the days in service, the total cost may be expensed regardless of when the asset was put into service.
Note, computer software that is bought “off the shelf” is permanently allowed to be expensed through Section 179. In order to be considered “off the shelf”, the software must be available to the general public, and not be custom designed.
The PATH Act has also made the research credit permanent, along with special provisions for small businesses. For tax years 2016 and after, eligible small businesses ($50 million in gross receipts or less) may offset the Alternative Minimum Tax as well as the regular tax. In addition, an eligible small business may elect to apply a portion of its research credit against the 6.2 percent payroll tax imposed on the employer’s wage payments to employees. Note, there are various restrictions and before claiming the credit you should consult your tax advisor.
Bonus Depreciation was extended under a phase-down schedule by the PATH Act for years ending after December 31, 2015. Also, there have been additional modifications that have enhanced the benefit of bonus depreciation.
One modification relates to expanding the definition of eligible “qualified leasehold improvement property”. Under the new more broad definition, improvements that are made to the interior of a nonresidential real property building would qualify for bonus depreciation under the expanded definition, “Qualified Improvement Property”. Certain property however will not qualify under the expanded definition; these exclusions include internal structural framework, enlargements and elevators. Some businesses may choose not to elect bonus depreciation for some assets, with the intention of spreading depreciation evenly over future years.
There were additional changes made to the Repair Regulation rules for 2016. The De minimis safe harbor allows taxpayers to annually decide to expense the cost of property, supplies, or materials produced or acquired subject to a dollar limitation. Originally the dollar limitation for taxpayers without applicable financial statements was $500. Starting in 2016, this number has been increased to $2,500. Thus, consideration should be given to updating your fixed asset capitalization policy to include the new threshold if so elected.
Taxpayers who operate retail stores or restaurants are now allowed to treat 25% of qualified remodel/refresh costs as capital expenditures, with the remaining 75% of the costs taken as deductible repairs and maintenance expenses. Note certain restrictions apply, the remodel/Refresh regulation exclude automobile dealers, nonstore retailers, gas stations and manufactured home dealers.
It should be dually noted, although not certain, that the Trump administration will be proposing various tax changes in the upcoming year. It’s uncertain how successful the new administration will be with implementing tax reform in time to affect the 2017 tax year. However, tax year end planning should consider the potential impact on your decision process.
About the Author
Brian T. Dansa CPA
Brian is a Senior Associate in the Tax Advisory Group. He provides tax compliance services for both businesses and individuals.