PATH Act expands and protects tax benefits for small businesses

Summary

Taxpayers who run a small business or are starting a new business have some more stability this year – at least as far as their tax returns go. Because of permanent changes the Protecting Americans from Tax Hikes (PATH) Act made to the tax code, small businesses have some added certainty around those tax benefits and tax planning.

Small businesses and startups get a permanent and improved research credit

The research credit has been up in the air, expiring and being renewed dozens of times. The PATH Act not only made it permanent, but expanded it so more small businesses will be able to claim it. Beginning in 2016, eligible small businesses can claim the credit against Alternative Minimum Tax (AMT). Small start-ups can claim the credit against their portion of the payroll tax.

“The research credit is a valuable credit for businesses that invest in research. But businesses without a taxable income – a common situation for a lot of new businesses and startups – could not qualify,” said Kathy Pickering, executive director and vice president of The Tax Institute at H&R Block. “The PATH Act makes this credit available for more business owners and entrepreneurs, especially of smaller and younger businesses.”

Businesses can count on quickly depreciating and expensing property

Ordinarily, the cost of business property is allocated and deducted over several years under depreciation guidelines. However, several provisions have allowed businesses to write off some or all of the cost of property more quickly. But because these provisions have continuously expired and then been renewed, it hasn’t always been easy for business owners to plan to take advantage of them.

The PATH Act extends bonus (or, first-year) depreciation through 2019 and makes 15-year depreciation for qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property permanent.

Businesses may also choose to deduct a portion of the cost of qualifying property – which the PATH Act permanently sets at $500,000 – rather than depreciating it.

“The limits and phase-out thresholds for expensing, rather than depreciating, qualifying property costs have changed over the years. Permanently setting these will help businesses plan their capital expenditures,” said Pickering.

Switching from a C corporation to an S corporation won’t necessarily mean built-in gains tax

A C corporation that elects to become an S corporation pays a 35 percent built-in gains tax on all undistributed gains when assets are sold or disposed of by the S corporation during a certain period of time. However, by waiting a predetermined length of time, the gains can escape built-in gains taxation. This timeframe was originally 10 years, but was reduced to seven years in 2009 and then to five years in 2011. The PATH Act made the five year timeframe permanent, after which the S corporation can avoid the 35 percent tax on gains.

“The small business tax benefits that the PATH Act made permanent, expanded or extended can make tax planning more certain for small business owners – but only so far as they are familiar with them and know how to use them effectively,” said Pickering. “The tax landscape has changed for small business owners, so it is more important than ever for them to talk with a small business tax professional.”