Nothing is ever permanent—so take advantage of these opportunities before the laws change.
There may be uncertainty about the long-term tax policies of the Trump Administration, but rest assured, there are still some significant tax-saving opportunities out there for central Illinois businesses. Many of them came to be with the passage of the Protecting Americans from Tax Hikes Act of 2015 (PATH 2015) and are still in force today. Of course, it seems nothing is ever permanent, so if your business qualifies this year, you may want to take advantage of the tax relief before the laws change. Again.
Below, we are highlighting a bonus depreciation opportunity and three tax credits that could benefit hundreds of area businesses. Keep in mind that a credit is almost always the most attractive tax incentive you can realize because it actually reduces the amount of tax owed. A $10,000 tax bill with a $2,000 credit reduces the bill to $8,000. What business couldn’t use that cash for something else?
Bonus Depreciation for Qualified Improvement Property
Bonus depreciation allows a business to accelerate the deduction of capital expenditures in the year that certain machinery, equipment and other qualified tangible personal property is put into service. It is intended to serve as an incentive for businesses to fuel economic growth with their purchases. For 2016 and 2017, the accelerated bonus depreciation deduction is 50 percent of the qualifying cost, with a reduction to 40 percent in 2018 and 30 percent in 2019.
- Under PATH 2015 and beginning in 2016, “qualified property” now includes qualified improvement property. This means that improvements to the interior of nonresidential real property that are placed in service after the date the building was first placed in service may now qualify for bonus depreciation. In other words, a deduction may be claimed for half of the cost of renovating or updating the interior of a building structure, instead of depreciating that cost over the typical 39-year recovery period. This incentive does not include the enlargement of a building, addition of an elevator or escalator, or changes to the internal structural framework.
- Certain nonresidential leased space improvements are still afforded a shorter recovery period (15 years) as long as the building is at least three years old, the tenant and landlord are unrelated, and the building has not been expanded or structurally changed.
- New, acquired or renovated restaurants are also afforded favorable tax depreciation treatment.
Offset AMT with the R&D Tax Credit
Not only did PATH 2015 make the Research and Development (R&D) credit permanent, it enhanced it by making it possible to offset the alternative minimum tax (AMT) with R&D credits for certain taxpayers (averaging under $50 million in sales the prior three years). The thing to remember about this credit is that it is not reserved only for the classic research facilities full of scientists in white lab coats; companies that develop new products and more efficient processes may also qualify. And because the credit is now considered permanent, companies can actually plan their R&D activities knowing it will be there to offset some of the dollars invested. Some small startup companies, which may not be paying federal income tax, can allocate up to $250,000 of federal R&D credits generated after January 1, 2016, to offset the FICA portion of their payroll tax.
WOTC Returns to 28-Day Claim Requirement
One of the most underutilized business credits is the Work Opportunity Tax Credit (WOTC). Our clients see an average tax savings of $2,000 to $3,000 per qualified employee they hire—with some as high as $11,000. The difference for 2017 (and possibly, future tax years) is that employers have just 28 days to certify their claim after the date a qualified employee is hired. That means screening every new hire to see if he/she fits into one of the categories of qualified workers: veterans, ex-felons, summer youth, long-term family assistance recipients, the long-term unemployed and others. Adding these individuals to your workforce gives them a boost, while at the same time giving your bottom line a nudge toward the black. This credit is also one that can reduce AMT for affected taxpayers.
45L Energy-Efficiency Credit for Multi-Family Residential Buildings
Developers who completed new multi-family dwellings in 2016 may still qualify for an energy efficiency tax credit of up to $2,000 per unit. This includes apartments, condominiums, mixed-use developments, production homes, student housing and assisted care facilities. Some projects were initiated with the tax savings in mind, but even if you were not initially aware of it, there could be some benefit to your project.
All of this being said, it should be noted that there has been talk of repealing the AMT, dramatically reducing corporate and business tax rates, and either rolling back or enhancing other well-known tax provisions. The conversation at this time next year may be quite different. For now, grab what you can to minimize your tax burden. iBi
Mark Colvin is a regional leader in CliftonLarsonAllen’s federal tax solutions practice. He can be reached at (309) 495-8754 or mark.colvin@CLAconnect.com.