2016 Federal Business Tax Legislation Update
Author: Damien Martin
While 2016 has been quiet on the tax legislation front, numerous taxpayer-friendly provisions included in the 2015 tax extender legislation enacted late in December 2015 will be the primary focus of 2016 year-end planning for businesses and their owners. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) eliminated uncertainty by retroactively and permanently extending many popular “extender” provisions; however, a large number of these provisions were only temporarily extended, and many are already set to expire at the end of 2016. Here are select business provisions to consider for 2016 year-end planning:
- Research credit: The research and development (R&D) credit is generally available to businesses that develop new or improved products or processes. The PATH Act made the R&D credit permanent and expanded its application by allowing eligible small business taxpayers with less than $50 million in gross receipts to apply the credit against alternative minimum tax. In addition, certain small startup businesses with less than $5 million of gross receipts may now apply up to $250,000 of the credit earned against their payroll tax liability.
- Section 179 expensing: Generally, §179 allows certain taxpayers to deduct up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in a taxpayer’s trade or business. Absent an extension, taxpayers faced a much lower §179 expensing limit and phase-out threshold. The PATH Act permanently restored these limits, with both amounts indexed for inflation for tax years beginning after December 31, 2015. For 2016, businesses or their owners can expense up to $500,000 of qualifying property. This amount is reduced dollar-for-dollar by the amount of §179 property placed in service that exceeds $2,010,000.
- Bonus first-year depreciation: Bonus depreciation is a popular provision allowing an accelerated first-year depreciation deduction on certain qualifying new (not used) assets placed in service during a tax year. With the PATH Act, 50 percent bonus depreciation is allowable for qualified property placed in service between January 1, 2015, and December 31, 2017. The bonus depreciation rate is reduced to 40 percent for 2018 and 30 percent for 2019 and won’t apply for tax years 2020 and later, absent future legislation.
- Fifteen-year, straight-line depreciation for qualified improvement property: The PATH Act made permanent the beneficial 15-year depreciable life for qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property placed in service during the tax year.
- S corporation built-in gains recognition period: S corps generally are not subject to an entity-level tax; however, where an S corp that was formed as a C corporation later elects to become an S corp, the corporation is subject to an entity-level tax on its next built-in gain at the time the election is made if the gain is recognized during a recognition period. The PATH Act permanently reduced the period an S corp could be subject to this entity-level, built-in gain tax from 10 years to five years.
The following business provisions granted temporary extensions under the PATH Act are scheduled to expire in December. While Congress has historically extended these provisions, their fate remains uncertain pending future legislation:
- Indian employment tax credit
- Railroad track maintenance credit (including modification to qualifying expenditures)
- Mine rescue team training credit
- Qualified zone academy bonds
- Classification of certain race horses as three-year property
- Seven-year recovery period for motorsports entertainment complexes
- Accelerated depreciation for business property on an Indian reservation (including ability to elect out of acceleration rules in 2016)
- Election to expense mine safety equipment
- Special expensing rules for certain film, television and live theatrical productions
- Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico
- Empowerment zone tax incentives (including modification of enterprise zone facility bond employment requirement)
- Increase in limit on cover-over of rum excise taxes to Puerto Rico and the Virgin Islands
- American Samoa economic development credit
- Credit for nonbusiness energy property (including modification to efficiency standards requirement for windows, skylights and doors)
- Credit for alternative fuel vehicle refueling property
- Credit for two-wheeled, plug-in electric vehicles
- Second-generation biofuel producer credit
- Biodiesel and renewable diesel incentives
- Production credit for Indian coal facilities (including modification to previous credit limitations)
- Credits with respect to facilities producing energy from certain renewable resources
- Credit for energy-efficient new homes
- Special allowance for second-generation biofuel plant property
- Energy-efficient commercial buildings deduction
- Special rule for sales or dispositions to implement Federal Energy Regulatory Commission or state electric restructuring policy for qualified electric utilities
- Tax credits relating to alternative fuels (including propane)
- Credit for new qualified fuel cell motor vehicles