Update: As part of the year-end budget agreement in Congress, which was authorized on December 18, the Section 179 deduction and innovation credits have been made permanent. The bonus depreciation has been extended through 2019.
One thing most small-business owners agree on is that they hate anything to do with taxes. But the expiration of a number of key tax credits has put many of them in something of a bind.
These tax credits, also known as "tax extenders," because they tend to expire every year or two, are meant to stimulate the economy by giving smaller businesses an incentive, through deductions, to invest in equipment, property, and employees.
The National Small Business Association has identified about 31 tax extenders specific to business owners among the more than 50 general purpose provisions. A number of critical incentives face a December 31 deadline for renewal. After that deadline, small businesses won't be able to use them for the 2015 tax year, says Molly Day, a spokeswoman for the NSBA. And that could cost you tens of thousands of dollars or more.
The cost of the credits to the federal government makes them controversial, however, says Joseph Rosenberg, senior research associate at the Tax Policy Center, a non-partisan tax group run by the Urban Institute and Brookings. Nevertheless, their continual lapsing means it can be hard for business owners to plan for everything from buying new equipment to bringing in new staffers.
"[These tax credits] can be a big deal to the businesses that benefit from them," Rosenberg says.
Here are five top credits that have recently changed or lapsed, that could affect your tax payments for 2015, and how you do business in 2016.
1. Expense deductions
These are primarily taken through an Internal Revenue Service deduction called Section 179. In the years following the financial crisis, Congress employed this provision to allow businesses to immediately deduct up to $500,000 in new equipment or software for purchases of up to $2.5 million. That amount has reverted to its original, greatly reduced level of $25,000 on an investment ceiling up to $200,000. The 10-year cost of the extension is estimated at $3.5 billion, according to the Congressional Research Service. The Section 179 deduction is the most-used tax credit by small businesses, with more than a third of business owners reporting taking advantage of it, according to a March NSBA tax survey.
2. More write-offs
The bonus depreciation. This write-off is frequently used with the Section 179 deduction. It allows business owners to take further write-offs of up to 50 percent for qualified business property purchases in the year of purchase. Congress let this credit lapse at the end of 2014, and CRS estimates extending it would cost the federal government $3 billion over the next 10 years. While the tax incentive sunset in 2014, it could still be available to businesses making purchases in 2015, but Congress and the White House need to act to extend the credit before the end of the year.
3. Innovation credit
Also potentially available to business owners this year is the research and development tax credit that expired at the end of 2014. As its name implies, the credit allows businesses to write off various costs related to research and production, including some wages, supplies, and research costs. The credit has been extended 16 times since 1981, but it would cost the federal government more than $22 billion over the next 10 years, and it is the most expensive of the tax provisions being considered for renewal, says Rosenberg.
4. Faster depreciation
The 15-year straight line cost recovery deduction is meant for large-scale leasehold improvements for restaurant and retail spaces, among other things. It also steps up depreciation, slicing the usual time parameter of 40 years by about a third. The credit lapsed at the end of 2014, and CRS estimates the 10-year cost of the deduction at $5 billion.
5. Credit for hiring
The Work Opportunity Tax Credit gives entrepreneurs a tax credit for hiring employees from target groups, including veterans, food-stamp recipients, and ex-felons. The credit is for 25 to 40 percent of an employee's first year of wages. NSBA says only 3 percent of business owners report taking advantage of the credit. The deduction has an estimated $3 billion cost through 2025.