By: Michael DeHaven, CPA, Rainer & Co.
Guest Columnist, Philadelphia Business Journal

Ready or not, tax season is here.

In advance of the upcoming filing deadlines for corporations (March 15) and partnerships (April 15), it’s important to review some of the federal tax law changes that were just enacted in mid-December, as well as new reporting issues for entities filing in Pennsylvania.

Important Federal Tax Law Changes:

The federal PATH Act, which was signed into law in late December 2015, made many temporary valuable tax breaks permanent, and extended others. A good number of them were made retroactive to the beginning of 2015, so although it did not allow much time to utilize these provisions before the end of 2015, it’s important to be aware of the changes to take advantage of these worthwhile provisions.

Section 179 Deduction– Businesses are now allowed to deduct up to $500,000 in expenditures of qualified new or used property, which includes machinery, furniture, equipment and other personal property with a class life less than 20 years, as long as the entity has taxable income. The previous limit for Section 179 deduction was $25,000.

This deduction begins to phase out once the entity’s total qualified property expenditures exceed $2,000,000. Property not eligible includes buildings and their structural components, intangibles and property used outside the U.S.

This provision was made retroactive to Jan. 1, 2015. For years after 2015, both the $500,000 expense limitation and the $2,000,000 annual limitation on property placed in service are indexed for inflation.

Bonus Depreciation– This provision is now extended through 2019. It allows businesses to elect to write off 50 percent of the cost of qualified new assets with a recovery period of 20 years or less during 2015-2017. The percentage write-off drops to 40 percent during 2018, and 30 percent during 2019.

De Minimis safe harbor limit for capitalization– The limit has increased for capitalizing amounts paid to produce or acquire a unit of property from $500 to $2500. This increased limit applies to taxpayers that do not have a financial statement audit prepared on an annual basis. The limit for taxpayers undergoing an annual audit remains at $5,000. The effective date of this change is Jan. 1, 2016, but the use of the new threshold will not be challenged in tax years prior to 2016.

Other important federal tax changes that are effective for 2016:

• Moratorium on medical device excise tax – The 2.3 percent excise tax imposed on the sale of medical devices will not apply to sales during the 2016 and 2017 tax years.
• Research tax credit expanded – Eligible small businesses may now claim a credit against their AMT liability and may elect to claim a portion of their research credit against their FICA tax liability instead of their income tax liability.
• Liberalized rules for food inventory donations – The wholesome contribution rules were retroactively and permanently extended.
• Work Opportunity tax credit expanded – The credit was extended for five years and now includes eligible veterans and qualified long-term unemployed.
• Built-in gains tax – A reduction from 10 years to five years in the S Corporation recognition period for built-in gains was made permanent. S Corporation income is generally passed through to its shareholders, who pay tax on their pro-rata share of income. However, tax is paid at a rate of 35 percent for gains that were built in at the time of election during the recognition period.

Important Pennsylvania Tax Law Changes:

End of the Capital Stock Tax– Effective for tax years after Dec. 31, 2015, the archaic PA Capital Stock tax was repealed. This job-crushing tax was originally scheduled to phase out more than ten years ago. Now that it no longer applies, S Corporations and LLC’s must indicate “final” on their 2015 Pennsylvania Corporate Tax reports (Form RCT-101)

Michael DeHaven, CPA, is a shareholder of Rainer & Company, an accounting firm with offices in Newtown Square and West Chester, Pa.

February 2016