Christmas came a week early for many taxpayers in 2015.
On Friday, December 18, President Barack Obama signed into law a tax and spending package containing numerous tax breaks for individuals and businesses.
Of particular interest to many Hoffman & Associates clients may be the Conservation Easement Enhanced Incentive. In 2014, there was a provision in Sec. 170 of the Internal Revenue Code that allowed the value of qualified conservation contributions to be deducted up to 50 percent of a taxpayer’s contribution base (similar to AGI) and carried over to 15 succeeding tax years. For qualified farmers or ranchers, the deduction limit was 100 percent of the contribution base.
However, that enhanced incentive ended at the end of 2014 without Congress’s action and the easement limit reverted to 30 percent of a taxpayer’s contribution base and 5 years of carryover. As part of the now signed tax extender deal, the enhanced incentive is now permanent. The bill completely deletes the language in the code section that makes the enhanced incentive expire, so taxpayers now have peace of mind when considering conservation easements going forward.
Some other tax breaks included in the package include the following:
- IRA charitable rollover, which means once a taxpayer reaches age 70 1/2, he or she can make direct gifts from his or her IRA to charities of up to $100,000 per year. This would be more beneficial than taking withdrawals and then gifting to charity.
- Research and Development Credit, which incentivizes small businesses and startups to invest in research and development by allowing them the use of this credit against alternative minimum tax or even payroll taxes in some limited instances.
- Reduced S Corporation Built-In Gains recognition period, which is important for C corporation owners who are interested in converting to S Corporations. Under previous law, the corporation had to hold appreciated assets for 10 years or it would be taxed on their gains. Now, that holding period has been reduced to 5 years.
- Itemized deduction for state and local sales tax in lieu of income taxes. This could be beneficial if a taxpayer made a large purchase during the year that is greater than his or her state income tax obligation. This is particularly useful for taxpayers who live in states without a State income tax, such as Florida.
- Enhanced Sec. 179 Deductions, which allow businesses to deduct full purchase price of qualifying equipment and/or software purchased during the tax year. Businesses may deduct up to $500,000 of qualifying expenses on up to $2,000,000 of equipment. These were set to drop to $25,000 and $200,000 had this not been included in the tax extender bill.
- Once the Sec. 179 cap is reached, bonus depreciation was also made permanent in this tax deal. What that means is a taxpayer can deduct 50% of the depreciation in the first year instead of the normal 20%.
To illustrate this in conjunction with the enhanced Sec. 179 deductions, let’s say a company bought $750,000 worth of new equipment. They would be able to deduct the following:
- $500,000 – Sec. 179 deduction ($250,000 remaining after Sec. 179 deduction)
- $125,000 50% Bonus first year depreciation (of the remaining $250,000)
- $25,000 normal 20% depreciation (20% of the $250,000-$125,000)
- $650,000 Total First Year Deduction ($500,000+$125,000+25,000)
- $227,500 Cash Savings, assuming 35% tax rate
The tax extender bill contained numerous other provisions benefitting both individual taxpayers and businesses. If you have any questions about them, please feel free to contact Hoffman & Associates.