Not all of what business owners can expect on their federal taxes this year are the usual suspects.
And it’s a mix of the possibly good and possibly bad, as one may suspect.
What it is: This is an additional amount of deductible depreciation — an accounting convention that allows a company to write off the value of an asset over time — awarded above what would normally be available. Bonus depreciation is always taken right away, in the first year of operation for the deductible item, with equipment or machinery being easy examples of such items. It’s an incentive for those businesses making investments in a year that exceed Internal Revenue Code Section 179 limits.
How it’s changing: Along with a multitude of other tax credits businesses may be able to tap for their federal tax returns, bonus depreciation — offered some years but not others — is available at the 50 percent level, according to Jordan Amin, partner at EisnerAmper LLP.
Bonus depreciation is useful for larger businesses, those able to invest in new equipment costing more than $2 million, the spending limit under IRS Code Section 179, Amin said.
Section 179 allows businesses to deduct the whole purchase amount of qualifying equipment purchased or financed during the tax year. For Section 179 deductions, used equipment qualifies, whereas only new equipment is covered through bonus depreciation.
“The last few years, we’ve had to wait to see if Congress was going to extend those benefits, and last year they were permanently put in place,” Amin said. “Bonus depreciation is going to phase (down) over the next few years, but for 2016 it’s still in effect.”
The bonus depreciation will remain at 50 percent in 2016 and 2017, but then go to 40 percent in 2018 and 30 percent in 2019.
“But you have to make sure the assets are in service before the year’s end,” Amin said. “And that means operational and not just sitting on a warehouse floor.
“If you know that there’s going to be expenses you have to make anyway — if there’s a way to speed up the timing, you can get your tax dollars to help pay for some of that investment.”
R&D TAX CREDIT
What it is: Not just reserved for those in lab coats, this tax credit looks to encourage innovation in the United States by offering a credit to a business putting resources into work to improve or test a product of just about any sort. Businesses with less than $5 million in revenue a year can even take the tax credit against their payroll taxes. Of course, there are a number of things — too many to go over here — to look at for what counts as qualifying expenditures, particularly when those costs are not solely for supporting R&D activities, such as administrative functions.
How it’s changing: Last year, Congress also made permanent a research and development tax credit — after it had been extended 15 times — that Amin said businesses should look into and document certain expenses for to see if they qualify.
The R&D Tax Credit is a general business tax credit under IRC Section 41 for companies that incur costs related to activities intended to provide information to help eliminate uncertainty about the development of a company’s product.
Into the weeds
There are only certain types of depreciable property that qualify for the commonly taken Section 179 deduction. These items are just some of what counts:
— Source: IRS
DOMESTIC PRODUCTION ACTIVITIES DEDUCTION
What it is: Also known as the manufacturer’s deduction, this is a deduction against income derived from domestic manufacturing activities. It provides a tax incentive for those doing all or most of their production-related work (which can encompass many things) in the United States.
How it’s changing: Harry Quagliana, partner at Deloitte Tax LLP, also pointed out a separate domestic production activities deduction with surprising versatility, which falls under IRC Section 199.
“Confused by the name, a lot of people aren’t aware how broad this manufacturing deduction is,” Quagliana said. “The example I use all the time is how film production can qualify for this. … And that deduction can be up to 9 percent of taxable income.
“The IRS has not changed any availability on it and a lot of companies can use it.”
VALUATION DISCOUNTS FOR BUSINESS INTERESTS
What it is: If a transferred asset represents a minority interest in a business, then a reduction in the value of the asset is typically allowed. These discounts range from 15 to 50 percent for transfer tax purposes. An example from Investopedia.com is that, if a person had a 30 percent minority interest in a company, it does not entitle that person to some of the benefits awarded to majority owners; therefore, that person could receive a minority discount of 20 percent and bring the transfer value down.
How it’s changing: Back in August, the IRS put forth some proposed regulations that Michelle Spell of Chiesa Shahinian & Giantomasi PC says has those in the business community “up in arms.”
Spell said the regulations, which apply to IRC Section 2704, feature sweeping changes to the use of valuation tax discounts for any type of family limited partnership or other family business transfer.
“Typically, what would happen is if a person had an interest in a family business … when you made a gift of a minority interest in that company, whether during your lifetime or on death, there were certain discounts taken for lack of control due to the nature of the minority interest,” Spell said. “The new regulations would effectively eliminate most of the discounts available for lack of control within an entity.”
The original tax law, when it was enacted in 1990, was targeted at limiting the overuse of valuation discounts. It also referred only to corporations and partnerships. Now the variety of entities the law will affect is widening under the regulations.
“The thinking had been that the IRS was trying to eliminate discounts for people who were putting passive assets, such as securities, into a partnership solely for the purpose of attaining a discount on those assets by transferring minority interest to children or a spouse, but instead the regulations went far beyond that and they’re going to touch any family business,” Spell said. “That was not expected.”
The regulations could come into effect as soon as January, she added. Her firm’s clients are being advised that they can have their voices heard on the issue during a Dec. 1 public meeting.
Although there’s a chance the regulations will be revised, Spell said it’s best to plan for the worst.
“People who are doing year-end planning should think about planning transfers before the end of the year (to take advantage of) the available discounts,” she said.
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