For several years now, we’ve been unable to effectively employ our tax planning strategies to our own high standards due to the Government’s late action on tax laws.
And this action usually came at a time when most companies should be considering the tax impact of their financial decisions. For example, there are companies who will invest in capital equipment more readily when they can accelerate the deduction for the equipment, or they may invest more heavily in research and development when it creates tax credits.
However, when there is uncertainty in the tax benefits of these investments, many companies either defer their investment or don’t make an investment at all.
For the last several years, the IRS has signed into law, late in December or even into the following January, very beneficial tax laws that were retroactive back to the first of the year. As a result, we, as CPAs, press ahead into the new year without knowing for certain which laws were going to remain in effect until we reached December once again. This causes us difficulty in effectively planning throughout the year with clients, and frustrates them as well. This is never much fun for any of us.
Thankfully, many of the tax savings provisions were made permanent with the passing of the PATH (Protecting Americans from Tax Hikes) Act at the end of 2015. Now we can confidently and effectively plan for current – and even future – year tax liabilities, without the constant feeling that the rug might be pulled out from under us just when the Christmas decorations are going up.
Multi-year Tax Planning
With a handle on what much of the tax landscape will look like going forward, we can now begin to effectively control the income tax expense across multiple years.
As an example, if your company can begin to budget/project 12-36 months out, we can assist you in determining when you should invest in capital equipment or R&D, and how to take advantage of certain tax deductions across the years.
Thanks to the PATH Act, the fear surrounding growth and progression has been removed. These new tax planning laws now offer business owners a greater degree of freedom to both plan and grow. And that’s a big win in our book.
5 Benefits of the PATH Act
While there were many benefits of the PATH Act, we have highlighted five that are worth noting:
- Permanent extension of IRC Section 179
Section 179 of the tax code allows small businesses to immediately deduct up to $500,000 of investments. However, without Congressional action, this provision would have been scaled back significantly, and small businesses would only have been allowed to deduct $25,000 of investments. The PATH Act will make the expanded Section 179 limits permanent, while also indexing them to inflation.
- Bonus depreciation (extended)
Companies can now deduct 50% of the cost of new capital purchases through 2017. This deduction will then decrease to 40% in 2018, and 30% in 2019 for most types of property. Bonus depreciation applies to a larger share of investments than Section 179 does. Bonus depreciation is usually applied after section 179 expensing.
- Permanent extension and expansion of R&D tax credit
The most expensive provision in the PATH Act is the one that makes the research and experimentation credit permanent. The R&D credit allows businesses that engage in certain research activities to lower their overall tax burden. Since 1981, this credit has expired and been renewed 16 times, making it one of the most unstable parts of the tax code.
- Working Opportunity Tax Credit (extended)
This credit, aimed at the hiring of veterans and other candidates from particular ‘target groups’ who are qualified long-term unemployment recipients has been extended through to 2019, and expanded as of the start of 2016.
- Exclusion of gain on qualified small-business stock
The capital gains from the sale or exchange of qualified small-business stock which has been held for more than five years can now be excluded from income. This applies to the alternative minimum tax, and to regular income tax.
Worth the Wait
After several years of frustrating financial gridlock, the PATH Act was a welcome change of pace, proving that politicians can actually come to some sort of agreement when it comes to tax.
And it also means if you have a budget in place, we can help you reduce your taxes over the next 3 years. By working with Whittaker & Company, you will have a clear vision and roadmap in place for the growth and development of your business.
To get a business and tax plan put in place, contact us today.