The Protecting Americans from Tax Hikes Act (PATH Act), passed by Congress in December 2015, made important changes to tax law and regulations effective for tax years beginning on or after January 1, 2016. Other pieces of legislation impacting 2016 were the Bipartisan Budget Action of 2015, the Surface Transportation and Veteran’s Health Care Choice Improvement Act of 2015, and various IRS administrative announcements (passed throughout 2014 and 2015).
The third installment of our four-part series will cover specific items of tax legislation for businesses. The legislation and administrative actions that directly impact businesses covered in this installment include:
- tightening of related party loss rules
- work opportunity credit expansion
- increased eligibility for differential wage payment credit
- research credit offsets for AMT and payroll tax
- liberalization of bonus depreciation rules for building improvements
- enhancements for Section 179 expensing
- increased limit for de minimis safe harbor expensing
- new due dates for business returns
Be sure to read Part IV of our “What’s New for Taxes in 2016” series for updates that pertain to retirement plans. Part I of our series focused on items affecting individuals, and Part II covered updates specifically for partnerships.
Related Party Loss Rules Tightened
Generally, under related party loss rules, no deduction is allowed for losses from sales or exchanges of property, directly or indirectly, between certain related persons. Should a taxpayer acquire property by purchase or exchange from a transferor who sustained a loss not allowed because of the related party loss rules, then any gain realized by the taxpayer on a sale of other disposition of said property is recognized only to the extent that the gain exceeds the amount of loss that is properly allocable to the property sold or disposed.
For sales and exchanges on or after January 1, 2016, the PATH Act modified this related party loss rule to prevent losses from being shifted from tax-indifferent parties (for example, a foreign person not subject to U.S. tax) to another party, in whose hands any gain or loss with respect to the property would be subject to U.S. taxation.
Therefore, this general rule does not apply to the extent gain or loss on property that has been sold or exchanged is not subject to Federal income tax in the hands of the transferor immediately before the transfer, but any gain or loss on the property is subject to Federal income tax in the hands of the transferee immediately after the transfer.
Work Opportunity Tax Credit (WOTC) Expansion
This credit has been extended through 2019. It’s available by hiring individuals from certain disadvantaged groups, such as food stamp recipients, ex-felons, and veterans who’ve been unemployed for four weeks or more. The maximum credit ranges from $2,400 for most groups to $9,600 for disabled veterans who’ve been unemployed for six months or more.
Employers have an extended due date to claim the WOTC. They have until 9/28/16 to file the necessary forms to claim the credit for eligible workers who begin work for the employer on or before 8/31/16.
Increased Eligibility for Differential Wage Payment Credit
The PATH Act retroactively and permanently extended the credit for eligible small business employers that pay differential wages, that is, payments to employees for periods they are called to active duty in the U.S. uniformed services for more than 30 days. These payments are amounts that represent all or part of the wages that the service member would have otherwise received from the employer. This differential wage payment credit is equal to 20% of up to $20,000 of differential pay made to an employee during the tax year.
For tax years beginning on or after January 1, 2016, the credit applies to employers of any size who have a written plan that provides eligible differential wage payments to each of its qualified employees. A qualified employee is one who has been an employee for the 91 day period immediately preceding the period for which any differential wage payment is made.
Research Credit May Offset Certain Businesses Alternative Minimum Tax and Payroll Tax
This credit (also commonly referred to as the “research and development” or “research and experimentation” credit) has been made permanent. It rewards businesses that increase their investments in research. The credit, generally equal to a portion of qualified research expenses, is complicated to calculate, but the tax savings can be substantial. Please see our article for more information on the research credit and qualifying activities.
Eligible small businesses (ESBs) may claim the credit (for those credits determined for tax years that begin January 1, 2016 and later) against their Alternative Minimum Tax (AMT) liability as well as their regular tax liability. An ESB is, with respect to any tax year: a non-publicly traded corporation, a partnership, or sole proprietorship whose annual gross receipts for the 3-tax year period preceding the tax year does not exceed $50 million.
For tax years that begin January 1, 2016 or later, a qualified small business (QSB) may elect to claim a portion of their research credit as a payroll tax credit against their employer FICA tax liability, rather than against their income tax liability.
In the case of a corporation or partnership, a qualified small business is one that, with respect to any tax year, has gross receipts less than $5 million and did not have gross receipts for any tax year preceding the 5-year period ending with the tax year, as determined by specific code sections.
An organization exempt from tax cannot be a qualified small business. An individual can qualify if one meets the two conditions previously mentioned, taking into account the aggregate gross receipts in all trades or businesses.
The payroll tax credit portion is equal to the least of the following three amounts: an amount specified by taxpayer, not to exceed $250,000; the total research credit calculated for the tax year; or for a QSB that is not a partnership or S Corporation, the amount of the business credit carryforward under Code Section 39 for the tax year.
For partnerships and S Corporations, the election is made at the entity level. For all taxpayers, it cannot be made for a tax year if the taxpayer has made such an election for five or more preceding tax years.
Bonus Depreciation Rules Liberalized for Building Improvements
Qualified improvement property placed in service January 1, 2016 or later is now eligible for the 50% bonus depreciation, whereas qualified leasehold improvement is no longer eligible. This liberalizes the bonus depreciation rule because qualified improvement property is any improvement to an interior portion of a building that is nonresidential real property if the improvement was first placed in service after the building was placed in service. Qualified improvement property does not include any improvement expenses attributable to any elevator or escalator; internal structural form work of the building, or enlargement of a building.
This change means that building improvements are eligible for bonus depreciation regardless of whether the improvements are property subject to a lease. Therefore, if a taxpayer owns a building and creates separate spaces, for example in a warehouse, the expense for the improvements would be eligible for bonus depreciation, essentially taking some or all of the expenses up front. In addition, the improvements do not need to be placed in service more than three years after the building was placed in service, and structural components of a building that benefit a common area are no longer excluded from the definition of qualified improvements.
Enhancements to Section 179 Expensing
The PATH Act retroactively restores and makes permanent (1) the enhanced maximum Section 179 deduction of $500,000 (same as in effect from 2010 through 2014), (2) the enhanced Section 179 deduction phase-out threshold of $2 million (same as in effect from 2010 through 2014), and (3) the rule allowing Section 179 deductions for qualified real property.
Additionally, for tax years beginning after 2015:
- the $500,000 and $2 million limits will be indexed for inflation
- the special $250,000 deduction cap that previously applied to qualified real property will be eliminated
- air conditioning and heating units will be eligible for expensing
Increased De Minimis Safe Harbor Expensing
Under Tangible Property Regulations (TPRs) businesses typically must capitalize any amount paid to acquire or produce property. Small businesses were eligible in 2014 to make an annual safe harbor election to expense de minimis amounts. In tax years 2014 and 2015, that amount was limited to $500 for those businesses that did not have applicable financial statements.
Realistically, this amount was not reasonable to cover common expenses, such as a tablet, cell phones or some tools. The IRS has now increased the de minimis safe harbor amount to $2,500 for tax years beginning after 2015; however, they have stated that they will not challenge this issue in pre-2016 years, if the other requirements of the applicable regulation are met.
It is recommended that businesses with formal capitalization policies update their policies to reflect the new safe harbor amount, and/or to include a phrase similar to the following: “with a per item cost of $500 or less (or other amount as identified in published IRS policy)”. The business should then include updated IRS guidance with their policy, as necessary, to avoid a constant requirement to revise entire policies for a change in approved amount.
The de minimis Safe Harbor election is an annual election, and must be made each year on the tax return.
New Due Dates for Business Returns
For tax returns reporting 2016 information that are due in 2017, the following due date changes will apply. These changes are effective for returns with a December 31, 2016 year-end (tax years 2016 and beyond):
Filing Due Date
(Calendar Year 2016)
|Form W-2 (electronic or mail)
Form 1099-MISC (w/box 7, non-employee compensation)
Form 1065 – Partnerships
|Form 1120 – C Corporations||April 15th|
|Form 1065 on extension (now a 6-month extension)||September 15th|
|Form 1041 on extension||September 30th|
|Form 5500 series – Employee Benefit Plan on extension||November 15th|
|FinCEN 114 – FBAR (will be allowed to extend)||April 15th|
|Form 990 on extension (now a single 6-month extension)||November 15th|
For fiscal year filers:
- Partnership and S Corporation tax returns will be due the 15th day of the third month after the end of their tax year. The filing date for S Corporations is unchanged.
- C Corporation tax returns will be due the 15th day of the fourth month after the end of the tax year. A special rule to defer the due date change for C Corporations with fiscal years that end on June 30 defers the change until December 31, 2025 – a full ten years.
Download a printable version of the new due dates here!
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