Not to rail on Congress, but do you own a race horse? Of course not! How about a NASCAR track? Nope. A manufacturing facility in Puerto Rico? No such luck there either. On December 15th, 2015 Congress performed their perennial rescue of the misfit laws! While some of the tax extenders may be for very specific interests (and even comical in some respects), a lot of the extensions are useful to those in business. In addition to that, some of the extensions have been made permanent, which is excellent work coming from Congress!
What Could Have Happened?
Without the extenders, dozens of laws were set to expire 12:00am New Year’s Day or not exist at all for the year 2015. Not just tax laws, but an entire basket of laws ranging from the exploration of Mars, to agriculture, defense, homeland security, and even military and veteran’s affairs would and could have been affected.
Especially concerning for most business owners were the 52 tax laws and deductions that expired or missed their existence entirely as of January 1, 2016. Two of the most utilized deductions that would not have been allowed include the enhanced section 179 deduction and bonus depreciation. There were also individual level tax laws that were set to expire as well or not exist at all for 2015. For example, the itemized deduction for state and local taxes was set to disappear and cancellation of debt related to primary mortgages was also set to be lost.
What has been Extended?
The enhanced section 179 was extended to the tax year 2015 and at a level of $500,000, with a maximum investment limit of $2,000,000 before the phase out begins. Once the phase out begins, it phases the deduction out dollar for dollar to the amount of $2,500,000 in investments. This amount will be indexed for inflation in the future.
Exclusion of 100% of the Gain on Small Business Stock has also been extended. Under this provision, those selling stock in an appreciated small businesses, enjoy the benefit of being 100% gain free upon the sale of the stock Qualifying Small Businesses are those starting with under $50,000,000 in gross assets and the stock must be held for 5 years or longer.
The Built in Gains recognition period for S Corporations has been set for 2015 at 5 years. This applies to C corporations that convert to S Corporations. In the past, those that converted were liable for taxes at the same rates that would have been paid had they been a C Corporation for 10 years. This extended provision cuts this detriment to 5 years.
In the past, business people and individuals alike had to engage in this will-they-or-won’t-they kind of analysis only to hurry the issues along in the last weeks of the year. This year, permanency has been added. Specifically Section 179 is now permanent; however, the amounts are indexed to inflation adjustments.
The Research and Development Credit also hurt from this wait-and-see system of tax law. With Section 179 and bonus depreciation, the solution to a lazy tax law is simply a quick purchase of equipment. The problem with the R&D credit not being permanent was that research and development takes time. Not allowing medical, technical, and other research and development firms to have the certainty of a tax credit has frightened those firms into not funding the projects as they should have. The credit is now made permanent.
I’m sure many owners of race horses were happy to see the accelerated write-off of their horses. As a business person and individual taxpayer, I am happy to see this extension law passed as well. If you think you will be impacted by these tax extenders and would like details, there is a plethora of information online. As the name The Center for Financial, Legal & Tax Planning implies, we do a lot in the way of tax planning. We also do valuations and business succession for business owners and individuals as well. If you would like to have your business valued or succession plan made, give us a call at 618 997 3436.
By: Roman Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors