By Tina Suhocki and John McCann
CPAs in public accounting firms do their fair share of yearend tax planning services. The past several years, have been particularly challenging due to Congress not acting on the Bush-era and other “tax extenders” until so late in the year, most tax planning was already completed.
However, with the passage of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) in December 2015, Congress made some of the significant tax extenders permanent or extended them for several years, making the task a breath of fresh air.
Below are some of the significant tax planning opportunities taxpayers can now stand firm on thanks to the PATH Act:
Section 179 expensing of the costs of qualifying equipment:
Businesses may expense up to $500,000 of the cost of qualified equipment purchases. The deduction phases out dollar-for-dollar on total investments between $2 million and $2.5 million. This deduction has been made permanent.
Bonus depreciation:
The Bonus Depreciation deduction has been extended through 2019. Businesses may expense up to 50 percent of the cost of qualifying property for tax years 2015 through 2017. Expensing under this provision is limited to 40 percent in 2018, and 30 percent in 2019.
Businesses contemplating the purchase of fixed assets in the near term should consider whether it is more beneficial to make those purchases during 2016 and take advantage of the section 179 and bonus depreciation expensing currently, or postpone those purchases to 2017.
15-year recovery period for qualifying property:
Now a permanent provision, businesses may assign a fifteen year life to qualifying leasehold improvement, retail improvement, and restaurant improvement property for depreciation purchases.
Research and Development Credit:
The R&D credit has been made permanent, with some new tax-advantageous changes. In the past, taxpayers generating the credit were not allowed to actually use it if they did not have taxable income or were subject to Alternative Minimum Tax (AMT). For tax years beginning after December 31, 2015, however, businesses with less than $50 million in gross receipts may now use the credit to offset AMT.
In addition, small businesses may now elect to convert a portion of their R&D credit to a payroll tax credit and use it to offset the employer portion of payroll taxes. A small business is one with less than $5 million in gross receipts and that did not have any gross receipts prior the five-year period ending with the tax year. In other words, this option is limited to start-up business, and the election can only be made for five tax years.
American Opportunity Tax Credit:
This 2009 provision has now been made permanent and allows taxpayers to take a credit for the cost of qualifying tuition expenses paid for an eligible student (up to $2,500 per student) for his or her first four years of higher education.
Charitable distributions from IRAs:
This provision allows seniors age 70 ½ and older to distribute money tax free (up to $100,000) from an IRA directly to a charitable organization.
Aside from the PATH Act provisions, taxpayers may consider taking advantage of the following strategies to decrease their taxable income or offset their tax liability:
IRA Deduction:
For 2016, individual taxpayers not covered by an employer-sponsored retirement plan may make a contribution to (and receive a corresponding tax deduction for) a traditional IRA of up to $5,500. Taxpayers 50 years and over may make additional contributions of $1,000.
Medical expense write-off for seniors:
Starting with tax year 2017, the medical expense write off will be subject to a 10 percent of Adjusted Gross Income (AGI) limitation. The threshold for 2016 is slated at 7.5 percent of AGI. Taxpayers 65 years and over who are contemplating elective health procedures should consider having those procedures done during 2016 rather than 2017 to take advantage of the lower phase-out threshold.
Suhocki and McCann are CPAs at Teal, Becker & Chiaramonte CPAs, PC.