Financial: Tax Savings from Another Late Law

By Mark E. Battersby

 

Once again, lawmakers waited until late in the year to pass another “extenders” bill. The new “Protecting Americans from Tax Hikes (PATH) Act of 2015″ retroactively extends the 50 or so temporary tax provisions that are routinely extended on a one- or two-year basis.

The so-called “Cadillac” tax on the high-cost health insurance plans so many pressure washing business owners provide themselves and key employees will be delayed from 2018 to 2020. And, beginning with the Forms W-2, W-3, and returns for reporting non-employee compensation (e.g., Form 1099-MISC) filed after 2016, PATH requires them to be filed on or before January 31 of the year following the calendar year to which such returns relate. No longer are they eligible for the extended filing date for electronically filed returns.

Also, extended by PATH are many of the tax-favored investment incentives employed by many businesses to attract badly-needed capital, such as the New Markets tax credit and the so-called “Empowerment Zone tax incentives. But, the big deal for many will be the permanent extension of the Section 179 small business expensing deduction.

Section 179

The so-called Section 179 deduction, named for a provision in the federal tax law, allows a pressure cleaning business an up-front expense deduction for the entire cost of equipment ranging from computers to furniture to vehicles and machinery. The amount that small businesses are allowed to 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).

In an unusual move, lawmakers will allow these figures to be permanently adjusted for inflation beginning in 2016. What’s more, restaurants, retail establishments, and leasehold improvements will be eligible for 179 expensing in lieu of depreciation 

Finally, pressure cleaning businesses have certainty to make needed capital investments. Even better, an expanded definition of Section 179 property now includes qualified real property and eliminates the $250,000 cap on qualified real property beginning in 2016. It also treats air conditioning and heating units placed in service after 2015 as eligible for expensing.

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 benefit 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 allows businesses, which spend heavily on equipment, machinery, and other business property to reap large up-front tax breaks. Overall tax savings are predicted to be $281 billion over a 10-year period.

Many contractors and business owners will find 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 with any excess carried forward. Those actively involved in running a pressure cleaning business can, however claim losses generated by 50 percent bonus depreciation against other income but can also carry any still unused losses back for two years, thereby getting a refund check from Uncle Sam.

R & D

Overlooked and misunderstood by many pressure washing business owners and managers, the biggest provision in PATH is the “research and experimentation tax credit.”  According to many, it’s the grand daddy of all extenders, dating all the way back to 1981.

PATH has made permanent the Section 41 much-maligned research and development credit—a direct reduction of the operation’s tax bill rather than a deduction, which merely reduces the income on which the tax bill is computed—for qualified R&D expenses. While market research and product testing do not qualify, all research in the laboratory or for experimental purposes does.

In addition to becoming a permanent fixture, the R&D credit has been modified so eligible businesses with $50 million or less in gross receipts can claim the credit against their alternative minimum tax (AMT) liability. Also, some small businesses can claim the credit against their payroll tax liability.

Energy Efficient Commercial Buildings

A provision in PATH extends through the 2016 tax year, the above-the-line deduction for the cost of energy efficient improvements made to commercial buildings. A pressure cleaning business can get tax deductions for new or renovated buildings that save 50 percent or more of projected annual energy costs for heating, cooling, and lighting compared to model national standards, and partial deductions for efficiency improvements to individual lighting, HVAC and water heating, or envelope systems.

The tax deduction amount is up to $1.80 per square foot and is available to owners or tenants (or designers, in the case of government-owned buildings) of new or existing commercial buildings that are constructed or reconstructed to save at least 50 percent of the heating, cooling, ventilation, water heating, and interior lighting energy costs.

A partial deduction of $0.60 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.  The partial building improvement must reduce total heating, cooling, ventilation, water heating, and interior lighting energy use by 162/3 percent (162/3 percent is the 50 percent goal of the three systems spread equally over the three systems).

On a related note, the ASHRAE standards required for the energy efficient commercial buildings deduction have been updated in PATH. The provision modifies the deduction by updating the energy efficiency standards to reflect new standards of the American Society of Heating, Refrigerating, and Air Conditioning Engineers beginning in 2016.

Work Opportunity Tax Credit and Other Hiring Incentives

PATH retroactively extended and greatly expanded the Work Opportunity Tax Credit (WOTC) through the 2019 tax year. The WOTC allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of first-year wages up to $6,000 per employee ($3,000 for qualified summer youth employees). In situations where the employee is a long-term family assistance (LTFA) recipient, the WOTC is a percentage of first and second year wages, up to $10,000 per employee.

While the maximum WOTC for a pressure cleaning business hiring a qualifying veteran is generally 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 relative to the WOTC-eligible hiring date.

With individuals who begin work after December 31, 2015, the credit also applies to employers who hire qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more). The credit with such long-term unemployed individuals is 40 percent of the first $6,000 of wages.

The Built-In Gains OF S Corporations

As the economy improves, many pressure cleaning businesses are replacing much of their equipment and other business assets. Unfortunately, many are just discovering a corporate-level tax is being imposed at the highest marginal rate (currently 35 percent) on the so-called “built-in gain” of a business operating as an S corporation. That built-in gain is usually gains that arose prior to the pressure washing operation’s conversion from a regular ‘C’ corporation to an S corporation, and arises when assets are sold. PATH retroactively and permanently provides that, for determining the net recognized built-in gain, the recognition period is a 5-year period—the same period that applied to tax years beginning in 2014.

In other words, the built-in capital gains of a corporation, which has become an S-corporation must be held for five years in order to avoid a conversion capital gains tax.  Permanently reducing the S corporation recognition period for the built-in gains tax 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

Many incorporated pressure cleaning businesses, start-up or existing, use a unique “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.

Under pre-Act law, the exclusion was to be limited to 50 percent of the gain for stock acquired after Dec. 31, 2014. The new PATH Act retroactively and permanently extends the 100 percent exclusion and the exception from minimum tax preference treatment.

Thanks to the complexity of the new law, professional assistance may be required to maximize write-offs for the 2015 tax year as well as in planning to take advantage of the extended benefits in the years ahead. Which of the $620 billion in tax savings from the Protecting Americans from Tax Hikes (PATH) Act of 2015 will your pressure cleaning business benefit from?