Congress has passed the Protecting Americans from Tax Hikes (PATH) Act of 2015 and the President appears ready to sign it along with a budget. The attached article in Forbes Magazine has the details but the bottom line is that the tax portion of the deal is a huge win for capital intensive businesses both large and small. There are a few bones for service related businesses and real estate businesses but not many. For the capital intensive businesses who anticipate purchasing a lot of equipment over the next five years this is “Huuuuuuuuge” to borrow a phrase of a famous (or infamous depending upon your political views) presidential candidate.
The big take away from a broad business perspective are the three following permanent or nearly permanent changes which impact decision making. Since combined federal and state rates are between 40% and 55% for most business decision makers (job creators) the first two items I discuss below mean that the federal government is going to pick up a significant portion of new capital investment thus the payback on those investments should be shorter and more likely to occur.
1. Section 179 depreciation (immediate write-off) is now available on all equipment purchases (new or used) up to $500,000 per year and this provision is a permanent change to the tax code which means that we won’t have to wait until December each year to find out if its retroactively reinstated to the beginning of the year. This provision phases out if you buy over $2 million of equipment but few small businesses purchase $2 million in equipment in a year. Certain leasehold improvements, restaurant improvements, and retail improvements also qualify for this treatment.
2. Bonus depreciation (new equipment only) is extended until 2019. The bonus percentage is 50% in 2015-2017; 40% in 2018; and 30% in 2019. This five year implementation will help business large and small plan their capital investments with the knowledge of how it will be treated for tax purposes.
3. The research and development tax credit is now permanent after 30 plus years of extensions and modifications. The R&D credit is used extensively by large businesses and on an increasing basis by smaller and midsize manufacturers, certain construction companies, and technology Company’s including many of our clients to reduce their effective tax rate with the credits. With permanency the credit can now be calculated with certainty from a planning perspective and decision makers will now know in advance how the tax code will reward those activities. As a side note many midsize S Corporations, partnerships and proprietorships cannot use the credit due to the Alternative Minimum Tax (AMT). For 2016 (and perhaps beyond if extended) the AMT will not apply to businesses with less than $50 million in sales.
Please consult your tax professional with the firm should you have any questions regarding how this legislation could affect you or your business.