It was announced recently that Congress had reached agreement on the long-awaited tax extenders that companies and individuals have been following.
While the legislation has not yet been signed into law, it is expected to be signed by President Obama shortly. More than 50 provisions that offered a variety of tax credits to businesses and individuals officially expired at the end of 2014. The one-year extension for those came late – with only about 10 days for taxpayers to implement any potential strategy changes. To help our clients, prospects, and others, Hanson & Co. has provided a summary of key extenders below.
Permanently Extended Provisions
Below is a list of the permanently extended tax provisions:
- Section 179 Expensing – The amount that taxpayers are allowed to deduct immediately for business investments (instead of depreciating and deducting them over a period of several years) was previously capped at $25,000 (with a phase-out dollar-for-dollar beginning at $200,000). This threshold will now permanently be fixed at $500,000 per year (adjusted for inflation and phased out at $2 million per year). This significant hike will allow small businesses the certainty they need to make capital investments to grow their businesses. In addition, qualified leasehold, retail, and restaurant improvements are permanently eligible for an accelerated 15-year depreciable life under Section 179 (instead of 39 years!).
- Research and Development Credit – Businesses with less than $50 million in gross receipts will be able to use the R&D credit to offset the alternative minimum tax. Also, certain start-up businesses without an income tax liability will be able to offset payroll taxes with the credit.
- No Capital Gains Tax on Section 1202 Stock – The 100% exclusion (subject to limitations) on Section 1202 stock, which allows a taxpayer who sells qualifying small business stock held for longer than five years to exclude part of the capital gain shares of their business, was permanently increased from 50%. This is a big deal for investors and small business owners, who can now be bought out on a tax-free basis if they’ve been in business for more than five years.
- 401(k) to SIMPLE IRA Rollovers – Some small businesses choose not to maintain a traditional 401(k) plan for their employees based on the cost. The tax system offers a SIMPLE IRA as a typically low-cost or free alternative that works similarly. One tax extender will now permanently allow rollovers from 401(k) plans to SIMPLE IRA balances if the SIMPLE IRA plan has been open at least five years.
- Charitable Contributions – Charitable organizations get a win on a few fronts. First, the provisions that enhanced deductions for the contribution of a business’ food inventory to charity and a reduction in a Subchapter-S corporation shareholder’s basis for charitable contributions were made permanent. Non-profits are also able to receive tax-free contributions from Individual Retirement Accounts from individuals over 70-1/2, which will certainly increase the likelihood of such donations.
- S Corporation Built-In Gains – This bill permanently reduces the built-in gains recognition period for corporations that become an S corporation. They will now only be subject to corporate-level tax on the disposition of appreciated assets owned at the conversion date for five years instead of being subject to a conversion capital gains tax for 10 years under previous law. This will allow businesses to change their entity status more fluidly to respond to changing market conditions.
Tax Cuts Extended Five Years
Below is a list of the tax extenders which have been extended for five years, through 2019:
- Bonus depreciation, a popular method of expensing asset acquisitions, will be phased out starting at an allowable 50% immediate expensing for 2015, 2016, and 2017 and then reducing to 40% in 2018 and finally 30% in 2019
- The Work Opportunity Tax Credit, which rewards employers that hire individuals from particular groups
- The New Markets Tax Credit, aimed at spurring investment in struggling areas
- Renewable energy credits and other energy provisions, such as:
- The 30% solar investment tax credit, which would begin a phase down at the end of 2019 but not fully expire until 2021 (ending at 10%)
- The wind production tax credit, which would begin its phase out at the end of 2016
This news changes the tax planning opportunities companies can leverage before year end. It’s important to assess these changes to determine how your company can benefit. To discuss your tax planning strategy and how these provisions can be applied to your tax situation, call us at (303) 338-1010, or click here to contact us. We look forward to assisting you!