Small businesses create jobs and help drive economic growth, and they can improve their bottom line at tax time under the Protecting Americans from Tax Hikes (PATH) Act that was passed in 2015. Recent provisions in the Act extend and protect certain tax benefits for businesses, making long-term planning easier for fledgling companies, entrepreneurial firms, and startups, to name a few.
• For assets placed in service in tax years 2018 and later, the PATH Act increased the maximum Section 179 deduction that you can take each year.
• Depreciation rules allow for 100% bonus "expensing" of assets acquired and placed in service after September 27, 2017, gradually phasing down each tax year until there is no further bonus depreciation after 2026.
• The PATH Act permanently shortens the recovery period for a leasehold, restaurant, or retail space to 15 years.
• Businesses making $50 million or less in gross receipts now qualify for the Research and Development (R&D) tax credit.
Extending Tax-Saving Opportunities
Tax provisions are usually subject to change, but the PATH Act extended or made permanent a number of benefits that help small business owners plan for future growth. This makes it possible for businesses to do things like invest and save money through tax breaks. The extension and permanence of PATH Act benefits can help businesses position themselves for financial success.
Depreciation Rules That Owners Can Appreciate
Internal Revenue Service depreciation guidelines allow small business owners to recover over time the costs of certain assets, such as equipment, machinery, software, and vehicles. It normally takes several years to recover costs through depreciation, because they must be deducted over a set period of time, known as the recovery period.
Section 179 Depreciation
For assets placed in service in the 2017 tax year, you can take a maximum Section 179 deduction of $510,000. The amount you can expense is reduced if you purchase more than $2,030,000 in eligible property during the year.
The tax changes enacted in late 2017 further increased the Section 179 benefits of the PATH Act. Beginning in 2018, the maximum Section 179 deduction increases to $1,000,000 with a maximum purchase amount of $2,500,000 before a reduction in the amount than you can expense.
Bonus depreciation has been changed for qualified assets acquired and placed in service after September 27, 2017. The old rules from 2015 still apply for qualified assets acquired before September 28, 2017. The new rules allow for 100% bonus "expensing" of assets that are new or used. The percentage of bonus depreciation phases down in 2023 to 80%, 2024 to 60%, 2025 to 40%, and 2026 to 20%. After 2026 there is no further bonus depreciation. This bonus "expensing" should not be confused with expensing under Code Section 179 which has entirely separate rules.
The 100% expensing is also available for certain productions (qualified film, television, and live staged performances) and certain fruit or nuts planted or grafted after September 27, 2017.
50% bonus first year depreciation can be elected over the 100% expensing for the first tax year ending after September 27, 2017.
Small business owners get several tax write-offs for leasehold, restaurant, and retail improvements as well. The PATH Act permanently shortens the recovery period for a leasehold, restaurant, or retail space to 15 years.
Owners Can Rely on the Research Tax Credit
The PATH Act permanently extends the Research and Development (R&D) tax credit, giving businesses that invest in research a tax break. Smaller businesses that previously didn't qualify for this credit—those making $50 million or less in gross receipts—now qualify under the Act.
As opposed to a tax deduction, a tax credit reduces the amount of taxes you owe dollar-for-dollar, which can result in a smaller tax liability or a larger refund. Certain small business owners can claim the credit against their alternative minimum tax (AMT). Other small businesses, such as startups making less than $5 million in gross receipts, can claim the credit against their portion of payroll tax liabilities.
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