2017 will be here in the blink of an eye, and with it a number of changes to tax laws that business owners will want to consider. It’s important that we begin planning for next year right now.
Of particular note to business owners are the following items:
Section 179 expensing/bonus depreciation
We’ve covered Section 179 before and are pleased to report that previously temporary provisions for limited expensing of capital investments and bonus depreciation have now become permanent (thanks to the PATH Act). That’s definitely welcome news for business owners.
Under Section 179 of the tax code, the expensing provision allows capital investments of up to $500,000 for certain property to be taken as an expense deduction -- rather than being depreciated. The break phases out for asset purchases above $2 million.
Notable changes to Section 179 this year include:
- The bonus depreciation provision allows businesses to claim additional depreciation for certain property in the first year of the recovery period if placed in service from 2015 to 2019 (with an additional year for certain property with a longer production period).
- For property placed in service in 2015, 2016 and 2017, the bonus depreciation is 50%. For 2018, it drops to 40%; for 2019, 30%.
- Air conditioning and heating units are now eligible for the expensing provision for tax years beginning after Dec. 31, 2015.
R&D tax credit
The research and development tax credit was also made permanent by the PATH Act. Our blog from October of this year detailed major changes to R&D law and highlighted the fact that more businesses might be able to take the credit thanks to a major expansion.
But beyond that, software developers have particular reason to celebrate. Some costs of developing software for internal use and third-party interaction have been made eligible. Under the final regulations, this includes any developed software that is intended to be:
- commercially sold, leased, licensed, or otherwise marketed to third parties.
- enables the taxpayer to interact with third parties.
- allows third-parties to initiate functions or review data on the taxpayer’s system.
If identified as internal use, the development efforts must meet the standard four-part test in addition to the three-part test of being highly innovative, involving significant economic risk, and being commercially unavailable for taxpayer use. Conversely, software that is not defined as internal use is not subject to the three additional High Threshold of Innovation qualifiers.
Tax deadline changes for partnerships and corporations
Back in January we laid out new rules and due dates for partnerships and C corporations and urged you to review those partnership agreements in preparation for the upcoming changes. If you didn’t take that advice, it’s imperative you do so now.
To review, the changes in due dates are designed to make flow-through entity returns due before the investor’s tax return is due. Therefore:
- partnerships that operate on a calendar-year basis will have to file or extend their tax returns (Form 1065) by March 15 rather than April 15. This change will make the due date the same as S-corporations.
- the due date for C Corporations that operate on a calendar-year basis is also being moved from March 15 to April 15.
- the deadline will also be changed for C Corporations using a different filing period, as will the deadlines for partnerships using a different filing period. Those changes may be found here.
New partnership audit rules
Effective in 2018, the IRS has issued new audit rules for partnerships that make partnerships liable at the entity level for tax collections associated with audits, rather than the partners themselves.
The changes, which will have a significant impact on how partnership interests are valued and transferred, are quite complex. Those involved in partnerships should consult their BGW advisors for an assessment.
Tougher rules for family partnerships
For several decades, estate planners have been utilizing family limited partnerships (FLPs) and family limited liability companies (FLLCs) as “creative” planning tools to effectively discount the value of gifts. In August, we detailed proposed changes that would change how minority stakes impact both personal estates and families with active business operations. Those changes included rules for how minority stakes in family-owned businesses are valued when owners transfer interests to the next generation, and what happens during a “deathbed” transfer.
Note that these changes have not been finalized. However, we once again urge business owners who have been considering passing along part of their ownership interests to family to consult with their tax advisors about accelerating those plans to take advantage of current rules.
Next week we will continue our Educational Impact Seminar Series with “Tax Planning and Tax Updates for 2017”. Our panel of BGW experts will discuss what new tax rules have passed, and what’s pending. The items above are not an exhaustive list! Changes to your personal tax return will also be covered.
Tax planning isn't something most Americans want to think about during the festive holiday season, but having a year-round plan that takes into account the various tax laws can save you a lot of hassle and a little green come tax time. See you next week!