How Tax Extensions from the PATH Act Affect Commercial Bankers

by: Smith and Howard

April 10, 2016

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Taxes aren’t something that bankers usually discuss with borrowers. But this year might be an exception. Several major tax law changes occurred at the end of 2015 that will allow borrowers to plan with greater certainty and take advantage of numerous tax-saving opportunities.

Commercial bankers and the research credit

The Protecting Americans from Tax Hikes (PATH) Act of 2015 permanently restores the research credit, retroactive to January 1, 2015. Since it started, this credit has been extended on a temporary basis several times — but it was never a sure win, making it hard for businesses to evaluate R&D spending.

There are two additional tax benefits that take effect in 2016 for certain borrowers:

  1. Starting in 2016, qualified small businesses with $50 million or less in annual gross receipts may claim the research credit against alternative minimum tax (AMT) liabilities.
  2. Also starting in 2016, qualified start-ups with less than $5 million in gross annual receipts may claim the research credit against up to $250,000 in FICA taxes annually for up to five years.

This permanent and expanded tax break is exciting news for borrowers that invest in research projects, such as technology companies, pharmaceutical firms and other advanced manufacturers.

Commercial bankers and depreciation tax breaks

For 2015, the new law permanently and retroactively reinstates the increased Section 179 expensing limit for qualifying fixed assets to $500,000 (up from $25,000 under the previous rules), including purchases of computer software and qualified real property.

The phaseout threshold has also been increased to $2 million (up from $200,000). Both the limit and the phaseout amount will be indexed for inflation for tax years beginning after 2015. 

When a borrower elects Sec. 179, it’s eligible to immediately expense the cost of qualifying new and used fixed asset purchases, which can result in significant tax savings. As an added bonus, companies are now permanently allowed to use 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements. (Previously, these items were depreciated over 39 years.)

First-year bonus depreciation is also back under the new law — but only temporarily. This provision allows borrowers to immediately expense 50% of the cost of new property purchased and put in service through tax years starting in 2017. Then it drops to 40% in 2018 and 30% in 2019. After that, bonus depreciation is set to expire.

For 2015, the PATH Act continues to allow corporate taxpayers to elect to accelerate the use of AMT credits in lieu of bonus depreciation under special rules for 2015. But, beginning in the 2016 tax year, the law will increase the amount of unused AMT credits that may be claimed in lieu of bonus depreciation.

These depreciation tax breaks are good news for asset-intensive businesses in need of more or upgraded equipment — and for bankers who finance these purchases.

Commercial bankers and S corporation recognition period

Borrowers who are contemplating switching from a C corporation to an S corporation will be happy that the period for recognizing built-in gains on sales has been reduced from 10 years to five years.

If an S corporation sells assets or equity within five years of electing this favorable tax status (or receiving property from a C corporation in a nontaxable carryover basis transfer), only the appreciation from that date will be exempt from corporate-level tax and, instead, flow through to shareholders personally. The rest of the gain will be taxed at C corporation rates, and any proceeds distributed to shareholders will be taxed again at the personal level.

Additional details

These are just a few tax breaks that have been revived under the PATH Act. More than 50 others made Congress’s final cut, including the permanent exclusion of gains on certain small business stock, the temporarily expanded Work Opportunity credit and various energy tax breaks.

If your borrowers are currently unaware of these developments, they might consider filing an amended tax return for 2015, if applicable. For more detailed information, advise borrowers to meet with their tax advisors.

Looking for more information on our commercial banker services? Contact Mark Abrams at 404-874-6244 or fill out our form for more information.

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