By Tony Perricelli, Scott & Company
You work hard to ensure your customers get what they want at a fair price and your vendors get paid in a timely manner. Both of these relationships work best when the prices and terms are clearly defined before the transaction takes place and there are no surprises. But what if your customers discovered that the prices for their merchandise randomly changed from the tag to the cash register? Imagine if your vendors quoted a price and then implemented a retroactive price increase after you had already sold the goods from that shipment. In both cases, those relationships would be strained or possibly even ruined. In a sense, that same uncertainty is what business owners have experienced with tax law for the last few years. Business owners could either go through an entire year without knowing what the tax law would be or thinking it was settled and then seeing Congress retroactively changing their “prices” at the last minute. Fortunately, Congress finally dealt with some of the uncertainty in mid-December 2015 with a law that not only extended some expired tax provisions, but also gave permanent status to some items that had typically been only extended year-to-year.
The PATH Act
On December 18, 2015 President Obama signed the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). The PATH Act accomplishes two things of particular interest to retailers. First, it makes permanent certain key business tax provisions that previously only had temporary status. Second, it extends other provisions for a period ranging from two to five years.
Permanent status was granted to key business-friendly provisions including:
• Enhanced Sec 179 expensing
• 15-year cost recovery for qualified leasehold improvements, restaurant property, and retail improvements
Enhanced Section 179 expensing
Without passage of the PATH Act, Sec 179 expensing for businesses would have plummeted to $25,000 on a maximum property investment of only $200,000 for 2015. With the PATH Act, though, the 2015 amounts are now back to 2014 levels–a $500,000 maximum deduction that does not phase out until you reach $2 million in property acquisitions each year. These new 2015 amounts will also be indexed for inflation beginning with the 2016 tax year giving business owners certainty in the amounts.
15-year cost recovery
The PATH Act permanently extends a special 15-year cost recovery rule for certain types of real estate improvements. Under general tax rules, improvements to real estate are depreciated over 39 years for commercial property. Several years ago, Congress acknowledged that many property users—in particular, those in the restaurant and retail industries or using space for commercial offices—will improve or refresh their properties more often than once every 39 years. To give such users the ability to deduct their improvement costs more quickly and avoid continuing to depreciate outdated costs, Congress passed a special 15-year cost recovery exception for three categories of improvements:
• Qualified leasehold improvements—generally commercial office space
• Qualified restaurant property—more than 50% of property is used for prep & consumption of meals
• Qualified retail property—property open to the public selling tangible goods
The special 15-year rule is only allowable for properties that have been in service more than 3 years at the time the improvements are made and does not apply to improvements that enlarge the building.
New for 2016, bonus depreciation (as described in the next section of this article) is allowed for a new class of property called “qualified improvement property” or QIP. QIP is defined similarly to Qualified Leasehold Improvements but with two changes. The new law removes the 3 year use rule and the requirement that the improvements must be made pursuant to the terms of a lease. This allows bonus depreciation to be taken by either the tenant or the owner of the property—a change from prior years. Also a change from prior years, most restaurant and retail improvements fall under the definition of QIP so they are now eligible for bonus depreciation.
The PATH Act also extended many tax provisions on a temporary basis. Probably of most interest to retailers is the extension of bonus depreciation for 5 years and at declining rates and the two-year extension of the Work Opportunity Tax Credit.
Bonus depreciation is similar to Sec 179 expensing in that it allows an immediate deduction for purchases of property that would otherwise be depreciated over several years. Unlike Sec 179, though, bonus depreciation is only allowed on a pre-set percentage of the purchase price and the property must be purchased new—no used items. The PATH Act lays out the pre-set percentages to be deducted each year of the extended period as follows:
• 50 percent for 2015-2017 (same as before the extension)
• 40 percent in 2018
• 30 percent in 2019
After 2019, bonus depreciation will once again expire and will have to be renewed by Congress.
The PATH Act also extended the Work Opportunity Tax Credit through the 2019 tax year. The Work Opportunity Tax Credit is a credit retailers and other employers can take if they hire employees from targeted groups such as:
• Recipients of public assistance and food stamps
• Recipients of SSI
• Unemployed or disabled veterans
• Long-term unemployed individuals
The employer who hires individuals from these qualifying groups can take a credit of up to 40% of the first $6,000 of wages paid to the employee.
While this is just a brief overview of the provisions most likely to impact your retail business, The PATH Act also contains numerous permanent and temporary extensions of individual tax provisions. For more details on the individual extenders, please see this fact sheet from our affiliate firm BDO and our website at www.scottandco.com.
Member Service of the Month
Scott & Company
Scott and Company seeks to help their clients thrive in the current economical environment. The financial management firm supports South Carolina small to mid-sized businesses be successful in an ever-changing financial climate.