Path Act: Small Business Owner Impacts

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December 12, 2016 • Block Advisors

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Remember how we introduced you to the PATH Act a few weeks ago? As a refresher, the Protecting Americans from Tax Hikes (PATH) Act, made dozens of changes to the tax code, one of the most prominent being the potential delay of millions of refunds until February 15.

Aside from the potential refund delay, there are multiple other provisions that could affect you. Here are some impacts if you are a small business owner or entrepreneur.

C Corporation to S Corporation Transition

A C corporation electing to switch to an S corporation pays a 35 percent built-in gains tax on all undistributed gains when assets are sold or disposed of by the S corporation within a period of time. But, waiting a predetermined length of time, the gains can escape built-in gains taxation at the 35 percent corporate rate.

The impact: The PATH Act made the five-year recognition period permanent, after which the S corporation can avoid the 35 percent corporate tax on gains. (Originally it was 10 years, then changed to seven years in 2009, and then to five years in 2011.)

Business Property

Typically, the cost of business property is deducted under depreciation guidelines. However, several provisions have allowed businesses to write off some or all of the cost of property more quickly. But because these provisions have continuously expired and renewed, it hasn’t always been easy for business owners to plan to take advantage of them.

The impact: The PATH Act extends first-year bonus depreciation through 2019 and makes 15-year depreciation for certain types of property permanent. As a business owner, you also can choose to expense the cost of qualifying property – with the maximum limit now permanently set at $500,000, adjusted annually for inflation.

R&D Credit

Since the Economic Recovery Tax Act of 1981, the federal research and development (R&D) tax credit has never been made permanent. Because of this, business owners could not rely on it nor could use it as a tax planning tool.

The impact: Beginning in 2016, eligible small businesses can claim the research and development credit against the AMT. Small start-ups can claim the research and development credit against their portion of the payroll tax instead of against income tax. The PATH Act makes the research and development credit available to more business owners and entrepreneurs, especially of smaller and newer businesses.

Tax Planning

The PATH Act now gives taxpayers more certainty about key tax breaks. Review your previous years’ tax returns to identify any of these benefits you’ve used in the past, then forecast the benefits you may be eligible for in 2016 to maximize tax benefits for your 2016 tax return.

Know that the tax landscape has changed for small business owners, so it is more important than ever to talk with a small business tax professional.

Connect with a Tax Advisor who has expertise in maximizing tax benefits to create a better financial future.