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Lane Keeter, CPA

Partner: Tax Consulting, Estate Planning, and Heber Springs Managing Partner

2016 Year-End Strategies: Straddling Two Years of Significant Change (Part 2)

As I stated in this space two weeks ago, implementing tax strategies at year-end always presents unique challenges and opportunities. The impact of recent tax legislation and significant IRS rule changes during 2016 raises the stakes.

To reiterate, the Protecting Americans from Tax Hikes Act (PATH Act), passed in late 2015, changed both dramatically and through some nuanced revisions the dynamics of planning for the expiration of various tax breaks, and for the permanence of others.

Last time, we addressed year-end planning considerations for individuals. Now, lets tackle business planning.

Businesses seeking to maximize tax benefits through 2016 year-end tax planning may want to consider several general strategies, such as use of traditional timing techniques for income and deductions, in addition to the role of the tax extenders (those made permanent and those expiring at the end of 2016), as well as strategies targeted to their particular business.

Permanent Extensions for Businesses

Code Section 179 expensing. The PATH Act permanently sets the Code Section 179 expensing limit at $500,000 with a $2 million overall investment limit before phase out (both amounts indexed for inflation; for 2016 at $500,000 and $2.01 million, and for 2017 at $510,000 and $2.03 million, respectively). The PATH Act also permanently allows for the expensing of off-the-shelf computer software.

New for 2016, the PATH Act also removed the $250,000 cap related to the expensing of qualified real property. In either case, there is no prorated reduction based upon the portion of the year that a qualifying asset is placed in service.

Other permanent incentives. Other business incentives made permanent by the PATH Act include:
• Research credit (with enhancements for small business);
• Shorter recovery period for leasehold improvement, restaurant and retail improvement property;
• Five-year recognition period for S corporations built-in gains tax; and
• Shareholders basis reduction for S corporations charitable donation.

Five-Year Extensions for Businesses

Bonus Depreciation. The PATH Act extended bonus depreciation (additional first-year depreciation) under a phase-down schedule. In addition to extending bonus depreciation, a number of modifications have been made that enhance the incentive.

WOTC. The PATH Act extended the work opportunity credit (WOTC). In addition, the credit has been expanded and is available to employers who hire qualified long-term unemployment recipients.

Extenders Expiring At Year-End 2016

A few business extenders are scheduled to expire if not renewed by Congress:
• Film and TV production expense provisions;
• Energy efficient commercial buildings deduction;
• Mine safety equipment expense election; and
• Additional depreciation for bio fuel plant property.

Revised Repair Regulations Rules

The IRS issued sweeping tangible property regulations (i.e., the "repair regs") in 2013 to govern accounting for costs to acquire, repair and improve tangible property. The repair regulations impact virtually all asset-based businesses and continue to generate changes in 2016, with additional "clean-up" expected in 2017.

De minimis safe harbor. The tangible property regulations dealing with repairs include a de minimis expensing safe harbor that allows taxpayers to annually elect to deduct the cost of materials and supplies and units of property produced or acquired subject to a per-item dollar limit. Effective starting in 2016, the IRS increased the de minimis safe harbor limit under the repair regulations from $500 to $2,500 for taxpayers without an applicable financial statement (AFS).

Despite waiving the AFS requirement, certain IRS officials have indicated that an unwritten policy employing a $2,500 per-item deduction limit must still be in effect as of the beginning of the 2016 tax year in order for the $2,500 limit to apply for the 2016 tax year. Under such thought, use of the safe harbor for 2017 requires a policy be in place by January 1, 2017.

Remodel-refresh. The IRS supplemented the tangible property regulations with a safe harbor that allows a taxpayer operating a retail establishment or a restaurant to change to a method of accounting that allows the taxpayer to treat 25 percent of qualified remodel-refresh costs as capital expenditures under Code Sec. 263 and 75 percent of such costs as currently deductible repair and maintenance expenses. The IRS also described how taxpayers may obtain automatic consent to change to the safe harbor method of accounting.

As a business owner, you are always thinking of ways to improve your business bottom line, and a big part of that is tax minimization. You still have time to take advantage of these changes that may be applicable to you.

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