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 have been routinely extended on a one- or two-year basis.
What has been termed the “Cadillac tax” on the type of high-cost health insurance plans that many chiropractors provide themselves and their key employees with will be delayed from 2018 to 2020. The PATH legislation also suspends the 2.3 percent excise tax on medical devices through 2017. A levy on health insurers would stop for one year.
And, beginning with the forms W-2, W-3, and returns for reporting non- employee compensation (e.g., Form 1099-MISC) filed for the 2016 tax year and later, PATH will require them to be filed on or before January 31. They will no longer be eligible for the extended filing date for electronically filed returns.
However, the big deal for many chiropractors will be the permanent extension of the Section 179 small business expensing deduction.
The Section 179 deduction allows a practice an up-front expense deduction for the entire cost of equipment ranging from computers and furniture to fixtures, vehicles, and medical devices. 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 a year).
In an unusual move, lawmakers treated air conditioning and heating units placed in service after 2015 as eligible for expensing. PATH also will allow these amounts to be permanently adjusted for inflation beginning in 2016.
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 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 allows practices that spend heavily on equipment, machinery, and other property to reap large up-front tax breaks. Overall, tax savings are predicted to be $281 billion over a 10-year period.
Many practices will find the bonus depreciation break to be more valuable than the Section 179 deduction because the latter is limited to the taxable income of the practice 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.
Writing off leasehold improvements
Although few chiropractors operate from what our lawmakers label “retail buildings,” or fall into the category of restaurants, many practices making improvements to leased property may benefit from PATH’s new accelerated depreciation rules.
Under now-permanent special write- offs for qualified leasehold improvements and qualified restaurant and retail improvement property may qualify for shorter 15-year recovery periods. That’s right, PATH makes permanent a 15-year depreciable life for improvements made to restaurants and retail establishments—and to leased property. Without this unique write-off, many improvements would be depreciated over the much longer 39-year period associated with the building itself.
Increased research expense credit
Overlooked and misunderstood by many chiropractors, the biggest provision in PATH is the research and experimentation tax credit. According to many, it’s the granddaddy of all extenders, dating back to 1981.
PATH now makes permanent the Section 41 much-maligned credit for increased research expenses—a direct reduction of the practice’s tax bill rather than a deduction that 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 to becoming a permanent fixture, the research credit has been modified so eligible practices and businesses with $50 million or less in gross receipts can claim the credit against their alternative minimum tax (AMT) liability. Also, some small businesses and professional practices can claim the credit against their payroll tax liability.
Energy efficient commercial buildings
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 practice can get tax deductions for new or renovated buildings that save 50 percent or more of projected annual energy costs for heating, cooling, and lighting compared to model national standards, and partial deductions for efficiency improvements to individual lighting, HVAC, and water heating or envelope systems.
The tax deduction is up to $1.80 per square foot and 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 16.66 percent (the 50 percent goal of the three systems spread equally over the three systems).
On a related note, the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE) standards required for the energy- efficient commercial building deduction have been updated in PATH. The provision modifies the deduction by updating the energy-efficiency standards to reflect the new ASHRAE standards beginning in 2016.
The work opportunity tax credit
PATH retroactively extended and 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. 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 practice hiring a qualifying veteran is generally also $6,000, it can be between $12,000–$24,000, depending on such factors 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.
The WOTC provision for employing veterans permanently extends the 20 percent employer wage credit for employees called to active military duty. Beginning in 2016, the provision modifies the credit to apply to employers of any size, rather than employers with 50 or fewer employees, as under the current rules.
WOTC also applies to employers who hire qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more) who begin work after December 31, 2015. The credit with such long-term unemployed individuals is 40 percent of the first $6,000 of wages
The built-in gains of S corporations
As the economy improves, many chiropractors are replacing equipment and other business assets. Unfortunately, many are just discovering a corporate- level tax is being imposed at the highest marginal rate (currently 35 percent) on the built-in gains of a chiropractic practice operating as an S corporation.
These are usually gains realized prior to the practice’s conversion from a regular C corporation to an S corporation, and taxed when assets are sold. PATH retroactively and permanently provides that, for determining the net recognized built-in gain, the recognition period is five years—the same period that applied to tax years beginning in 2014.
In other words, the built-in capital gains of a corporation that has become an S corporation must be held for five years to avoid a conversion capital gains tax. Permanently reducing the S corpo- ration recognition period for the built- in gains tax will make it easier for incorporated practices to become S corporations and more fluidly change the status of their practice entity to respond to changing market conditions.
More extended deductions
There are, of course, quite a few more tax-saving provisions, many of them quite narrow in scope such as those for film producers, NASCAR racetrack owners, and racehorse owners, all included as part of PATH. In other legislation, the Trade Facilitation and Trade Enforcement Act of 2015 included a provision that increased the penalties for failure to file certain tax returns.
The complexity, the fact that many of its provisions apply to transactions occurring in 2015, and the uneven expiration date for many of these tax benefits makes professional assistance almost mandatory—at least if practices hope to reap their share of the $622 billion in tax savings available.
Mark E. Battersby is a tax and financial adviser, freelance writer, lecturer, and author located in Philadelphia. He can be reached at 610-789-2480.
Disclaimer: The author is not engaged in rendering tax, legal, or accounting advice. Please consult your professional adviser about issues related to your practice.