Finally, good news for business taxpayers

In an eleventh-hour negotiation between Congress and the White House last December, Congress passed, and President Obama signed, a major Tax Act (Act) providing relief and certainty for business taxpayers.

Among the many topics covered, the Tax Act made permanent the Code Section 179 about expensing, research tax credit, and changes the rules on S corporation built-in gains.

Code Section 179 allows a business taxpayer to expense up to $500,000 of qualified personal property purchased by a business so long as the total investment in property does not exceed $2 million. Both of these amounts are set to be indexed for inflation beginning in 2016. In addition to qualified personal property, off-the-shelf computer software now qualifies for Code Section 179 treatment. 

Code Section 179 provides a significant incentive for businesses to purchase qualified property and obtain an immediate tax deduction based upon the above limits. This deduction reduces the basis in property for purposes of depreciation but is an immediate expense so long as property is purchased and placed in service during the tax year, even if placed in service in the last month of the tax year. Code Section 179 deduction is in addition to the bonus depreciation and regular depreciation under the Internal Revenue Code. 

For the first time, the Act made permanent the five-year recognition period for built-in gain following conversion from a C corporation to an S corporation. This provision eliminates the corporate level tax at the highest marginal rates applicable to corporations who convert from a C corporation to an S corporation and recognizes sales of assets with a built-in gain any time after the first five years of the conversion. Previously, a C corporation that converted to an S corporation recognized built-in gain for a period of 10 years from the effective date of the conversion.  The five-year rule was in effect more recently, but was subject to annual renewal by Congress, and thus uncertainty existed year to year.

Finally, the Act also extends and makes the research tax credit permanent for the first time. According to Forbes Magazine, the changes will be of enormous benefit to innovative small businesses, especially startups. The research tax credit, sometimes called the research and development (R&D) tax credit, beginning in 2016 can be taken against the alternative minimum tax (AMT) and the Act allows qualified small businesses in their first five years to take a portion of the R&D tax credit against their payroll taxes, essentially making the R&D credit a refundable tax credit. Previously, businesses who were able to generate a R&D credit found that the credit had little, if any, value since they either had no income since they were startup businesses or they were limited to the AMT and the credit did not apply against the AMT. These changes make the credit available to many more businesses, and this is good news for the business community. 

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client Alert authored by: Edwin I. Josephson, Principal