With the recent passage of the Protecting Americans from Tax Hikes Act of 2015, business owners have income tax planning opportunities available to them.
One to consider is the Research and Development Tax credit, which was made permanent and is available to small business owners with $50 million or less in gross receipts or startup companies with less than $5 million in gross receipts for no more than five years. Startups can claim a credit up to $250,000 against a portion of payroll taxes.
Unlike prior years, in 2016 the R&D Tax credit can even be used to offset alternative minimum tax. This change can result in significant savings for business owners and should not be overlooked when making expenditure decisions in 2016, especially in light of the presidential election; Cruz, Sanders and Trump have each proposed to eliminate the AMT. With the potential elimination of the tax, it may be wise to take advantage of the credit in 2016 and not wait.
The PATH Act also made permanent the Section 179 deduction, which allows $500,000 indexed for inflation to be deducted annually by businesses for the purchase or lease of qualifying equipment or computer software, provided it is placed in service by year-end. The deduction begins to phase out dollar-for-dollar once purchases exceed $2 million. Although a 179 deduction does not increase the total amount allowed as a deduction, it does allow for the total amount to be deducted in a single year. It is even possible to lease equipment and take a deduction that is greater than the actual payments made for the year. Business owners should consider whether or not to claim this deduction and benefit from the timing difference.
Several other tax provisions are included with the PATH Act. Tax planning requires coordination among all of a business owner’s partners.
-Tracy Dalton, is senior vice president, wealth fiduciary services manager at Johnson Bank in Racine.
