If you're recently bought expensive office or business equipment, or plan to any time in the near future, a recent change to the tax code can result in significant savings.
In case you haven't been keeping a close eye on recent tax legislation, you'll want to know about the Protect Americans from Tax Hikes Act, or PATH Act, signed into law in December 2015. It can save you a bundle if you're planning to buy computers or office equipment, vehicles, or machinery for your business this year. It even offers the same savings if you bought the equipment already in 2015.
The new law makes permanent some tax breaks important to small businesses, and increases the deduction limit for qualifying equipment purchases to $500,000, an increase from $25,000 before the law was passed.
Not only that, if you've ever bought an expensive piece of equipment above the deduction limit, you know you must depreciate it over time, taking your deduction in stages. The PATH Act allows businesses to accelerate that depreciation and reap the tax benefits of a new purchase more quickly. In 2015 through 2017, businesses can depreciate half the cost of qualifying equipment. That goes down to 40 percent in 2018 and 30 percent in 2019. How much difference can this make? A lot. According to Balboa Capital, between the higher deduction limits and faster depreciation, a $750,000 piece of equipment can cost as little as $522,000 after tax savings.
In addition to the higher deductible limit and accelerated depreciation, there are three other provisions of the new law that benefit small businesses as well:
1. The R&D tax credit becomes permanent.
The tax credit for research that has been offered on a temporary basis becomes permanent with PATH Act. In some cases, small businesses can claim this credit against their Alternative Minimum Tax bill, or payroll tax bill.
2. 15-year write-off for leasehold improvements extended.
Improvements made to a rental property, such as a restaurant, can be written off in 15 years, instead of much longer. This welcome change to the tax law was made on a temporary basis in the last few years; the PATH Act makes it permanent.
3. Qualifying small business stock sales are spared capital gains tax.
Profits from sales of shares of a small business are 100 percent exempt from capital gains tax if the stock was acquired before 2017 and held for more than five years. This too extends an existing rule.
To help you understand how the PATH Act could benefit you, Balboa Capital has put together a useful infographic.