Once again, lawmakers waited until late in the year to pass another “extenders” bill. The new “Protecting Americans from Tax Hikes (PATH) Act of 2015″ retroactively extended the 50 or so temporary tax provisions that are routinely extended on a one- or two-year basis.
The big deal for many security dealers and integrators will be the permanent extension of the Section 179 small business expensing deduction.
First-Year Write-Offs
The so-called “Section 179” deduction allows every security dealer, reseller or systems integrator an up-front expense deduction for the entire cost of everything ranging from computers, to showroom fixtures, to vehicles and equipment. The amount allowed as a write off in the first year — instead of slowly deducting or depreciating over several years — is now permanently fixed at $500,000 per year (phased out dollar-for-dollar as expenditures begin to exceed $2 million in a year).
This means that for 2015 and tax years down the road, a security services business can expense up to $500,000 in equipment purchases. While the equipment can be new or used, if the equipment is purchased using a trade-in as part of the price, the Section 179 expense allowance can only be used on the excess of the cost over the undepreciated cost of the property traded in.
A Bonus Write-Off
Originally created as a short-term stimulus measure, bonus depreciation is back — albeit phased out over a five year period. Bonus depreciation, which permits the immediate deduction of any business equipment expenses, rather than a depreciated tax benefit over time, has been extended at the former 50 percent rate for the 2015-2017 tax years, phased down to 40 percent in 2018 and 30 percent in 2019.
Making it even semi-permanent enables businesses that spend heavily on equipment, machinery and other business property to reap large up-front tax breaks. Overall tax savings are predicted to be $281 billion over a 10-year period.
Many security services operations will find the bonus depreciation break may be more valuable than the Section 179 deduction, because the Section 179 expensing deduction is limited to the taxable income of the business with any excess carried forward. Naturally, losses generated by the 50-percent bonus depreciation can offset other income. They can also be carried back for two years, thereby generating a refund from Uncle Sam.
Increased Research Expense Credit
Overlooked and misunderstood by many in the security services industry, the biggest provision in PATH is the “research and experimentation tax credit.” According to many, it’s the “granddaddy” of all extenders, dating all the way back to 1981.
PATH has made permanent the Section 41 much-maligned credit for increased research expenses — a direct reduction of the operation’s tax bill rather than a deduction which merely reduces the income on which the tax bill is computed for qualified research expenses. While market research and product testing do not qualify, all research in the laboratory or for experimental purposes does.
In addition becoming a permanent fixture, the research credit has been modified so eligible businesses with $50 million or less in gross receipts can claim the credit against their alternative minimum tax (AMT) liability. Also, some small security businesses can claim the credit against their payroll tax liability.
Energy-Efficient Commercial Buildings and Fleets
A provision in PATH extends through the 2016 tax year the above-the-line deduction for the cost of energy-efficient improvements made to commercial buildings. A business can get tax deductions for their new or renovated buildings for expenditures that help save 50 percent or more of projected annual energy costs.
The amount allowed as a tax deduction is not based on actual expenditures but, rather, is an amount up to $1.80 per square foot. The deduction is available to owners or tenants (or designers, in the case of government-owned buildings) of new or existing commercial buildings that are constructed or reconstructed to save at least 50 percent of the heating, cooling, ventilation, water heating and interior lighting energy costs.
A partial deduction of $0.60 per square foot can be taken for improvements made to one of three building systems — the building envelope, lighting or heating, and the cooling system. The partial building improvement must reduce total heating, cooling, ventilation, water heating and interior lighting energy use by 16 2/3 percent (which is the 50-percent goal spread equally over the three systems).
On a related note, the ASHRAE standards required for the energy-efficient commercial buildings deduction have been updated in PATH. The provision modifies the deduction by updating the energy efficiency standards to reflect new standards of the American Society of Heating, Refrigerating and Air Conditioning Engineers beginning in 2016.
Those in the securities services industry thinking green will enjoy a tax credit for alternate fuel refueling “property” that has been extended; as has the biodiesel and renewable diesel incentives. The existing $1.00 per gallon tax credit for biodiesel and biodiesel mixtures has been extended through 2016. Also extended through 2016 is the 50 cents per gallon alternative fuel tax credit and alternative fuel mixture tax credit.
Another credit for buying new qualified fuel cell motor vehicles has been extended through 2016. It allows a tax credit of between $4,000 and $40,000, depending on the weight of the vehicle, on the purchase of such vehicles.
Work Opportunity Tax Credit and Veteran Hires
PATH retroactively extended and greatly expanded the Work Opportunity Tax Credit (WOTC) through the 2019 tax year. The WOTC allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of first-year wages up to $6,000 per employee ($3,000 for qualified summer youth employees). In situations where the employee is a long-term family assistance (LTFA) recipient, the WOTC is a percentage of first and second year wages, up to $10,000 per employee.
While the maximum WOTC for a dealer, reseller, integrator or security business hiring a qualifying veteran is generally also $6,000, it can be as high as $12,000, $14,000, or $24,000, depending on factors such as whether the veteran has a service-connected disability, the period of his or her unemployment before being hired, and when that period of unemployment occurred relative to the WOTC-eligible hiring date.
With individuals who began work after Dec. 31, 2015, the credit also applies to employers who hire qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more). The credit with such long-term unemployed individuals is 40 percent of the first $6,000 of wages.
When it comes to payroll taxes, the new law requires forms W-2, W-3, and returns for reporting non-employee compensation (e.g., Form 1099-MISC), to be filed on or before January 31 of the year following the calendar year to which such returns relate. Those returns are no longer eligible for the extended filing date for electronically filed returns.
Built-in Gains of S Corporations
As the economy improves, many security businesses are replacing much of their equipment and other business assets. Unfortunately, many are discovering a corporate-level tax is being imposed at the highest marginal rate (currently 35 percent) on the so-called “built-in gain” of a security business operating as an S corporation.
That built-in gain is usually gains that arose prior to the security services operation’s conversion from a regular C corporation to an S corporation, and arises when assets are sold. PATH retroactively and permanently provides that, for determining the net recognized built-in gain, the recognition period is a 5-year period — the same period that applied to tax years beginning in 2014.
In other words, the built-in capital gains of a corporation which has become an S corporation must be held for five years in order to avoid a conversion capital gains tax. Permanently reducing the S corporation recognition period for the built-in gains tax will make it easier for incorporated businesses to become S corporations and more fluidly change the status of their business entity to respond to changing market conditions.
Which of the Protecting Americans from Tax Hikes (PATH) Act of 2015 provisions can best help a security dealer or business reap its share of the $622 billion in tax savings? Thanks to the complexity of the new law, professional assistance may be required to maximize both the write-offs for the 2015 tax year and with planning to reap all the benefits it is entitled to in the years ahead.
Mark E. Battersby is a freelance writer that specializes in tax-related issues. Email him at [email protected].
