Last Minute Legislation Makes Permanent Business-Favorable Tax BreaksDecember 28, 2015
In early December, Congress passed and President Obama signed the “Protecting Americans from Tax Hikes (PATH) Act of 2015,” a tax package making permanent certain tax breaks that had previously expired every year or two years (requiring legislative action to be renewed). These now permanent tax breaks cover a range of entities and business practices. This alert addresses selected business provisions of the Act.
Action: Taxpayers should review all extended breaks; but may find those highlighted here particularly relevant. Tax benefits may be available by taking year-end action. Businesses and individuals that have already filed tax returns including 2015 tax periods should consider filing amended tax returns to take advantage of the new law.
KEY BUSINESS TAX PROVISIONS
MADE PERMANENT BY THE ACT
Exclusion of 100% of Gain on Certain Small Business Stock
The Act extends and makes permanent the 100% exclusion for gains recognized by eligible shareholders on the disposition of “qualified small business stock” (“QSBS”) purchased during 2015 and beyond. In addition, such gains will not be subject to the alternative minimum tax. IRC Section 1202(a)(4).
Subject to certain limitations, the exclusion percentages are as follows:
|Date of Acquisition of QSBS||Exclusion Percentage|
|Before February 17, 2009||50%|
|February 17, 2009 - September 27, 2010||75%|
|After September 27, 2010||100%|
Research Tax Credit
Businesses will be eligible for tax credits for qualified research expenses paid or accrued in 2015 and beyond. The value of the credit is calculated as a percentage of qualified research expenditures over a fixed-base percentage of certain receipts and returns. These percentages vary depending on whether the business is a startup or established entity. A simplified formula is also available. IRC Section 41(h).
The Act also provides, for tax years beginning after December 31, 2015, that certain small businesses with $50 million or less of gross receipts may use the credit against their alternative minimum tax (AMT) liability; and certain start-up businesses with less than $5 million of gross receipts may claim up to $250,000 per year of credit against the employer portion of FICA taxes.
Reduction in S Corporation Recognition Period for Built-In Gains
C corporations that elect S corporation status and S corporations that receive basis carryover property from a C corporation are subject to entity-level tax on gains built-in at the time of such transactions if such built-in gains are realized within a certain time after the election (or contribution, as the case may be). Historically, the tax on built-in gains generally applied to gains recognized within 10 years of the election of S corporation status or the acquisition of the carryover basis property. Under prior legislation, this period had been reduced to 5 years for dispositions of built-in gain property in years beginning in 2012, 2013 and 2014. The Act retroactively and permanently provides for a 5 year built-in gain recognition period for 2015 and later years. IRC Section 1374(d)(7).
Section 179 Expensing
Under IRC Section 179, businesses and individuals (other than estates, trusts, and some non-corporate lessors) may deduct, rather than depreciate, the cost (not exceeding the taxpayer’s taxable income) of new or used tangible property—such as computers. The amount eligible for expensing is subject to a “cap” and a phase-out if property costs exceed an “investment base.”
For qualified property purchased in 2015, the Act retroactively extends and makes permanent the $500,000 cap on deductions and the $2 million investment based phase-out amount. Both amounts will be indexed for inflation. The cap and investment base had been set to decrease to $25,000 and $200,000, respectively. The Act also extends and makes permanent Section 179 expensing of off the shelf computer software. IRC Section 179(b).
Bonus First-Year Depreciation
Although not made permanent like the provisions discussed above, the Act extends bonus first-year deduction of the adjusted purchase price of qualified property bought and used during 2015 through 2019. The bonus depreciation deduction is equal to a percentage of the depreciation allowance of the qualified property, and is allowed for regular tax as well as alternative minimum tax. It is not allowed for computing earnings and profits under IRC Section 312. The bonus deduction percentages set by the Act are, in general, as follows:
|Year(s) Property Placed in Service||Bonus Depreciation Percentage|
|2015 through 2017||50%|
Qualified property includes, for example, certain types of computer software, as well as MACRS-covered property, and eligible leasehold improvement property, if the business or individual claiming the deduction was the first entity to use the property.
Please contact Chip Wry to learn more.
Special thanks to Matthew Greene, 3L at Northeastern University School of Law, for his help with this Tax Alert.