Federal taxes have for years been one of the top headaches for small businesses with seemingly no end in sight. Among countless shifting tax provisions, retroactive extensions, and a large helping of legalese involving even the simplest of tax rules, small business owners are now required to spend a tremendous amount of time each year complying with federal tax regulations and filing their returns.
Just how much time? Well, a recent Small business Taxation Survey, conducted by the National Small Business Association (NSBA) reported that 22 percent of small business owners devote as many as 120+ hours a year, or four full work weeks, to their taxes. This includes activities such as: completing forms, keeping up with changing regulations, as well as organizing receipts and paperwork. A full one third of the small businesses surveyed spend more than 80 hours per year on their federal taxes.
Even as the current administration in Washington considers a massive tax overhaul that will supposedly make complying with federal tax regulations a whole lot easier and cheaper, the has been at least one recent bright spot: the PATH Act enacted at the end of 2015.
The PATH Act makes more than 20 tax breaks permanent in addition to retroactively extending a slew of others for two or more years. In some cases, these include significant modifications. Some of the extensions, such as those involving equipment purchases and payroll, give small business owners some breathing room to plan for and thus maximize certain tax deductions.
Here are three main areas where the PATH Act may positively help your business:
1. Equipment Purchases. With the PATH Act, the price of big equipment purchases can be fully written off in the year they are put into service instead of taking small deductions over a period of five years. Under Section 179, business owners are allowed to deduct up to $500,000 for either new or used equipment purchases. The deduction limit starts to phase out when qualified property is more than $2 million. Both deduction amount and limit will be adjusted for inflation starting in 2016.
On top of this, the PATH act offers a second, “bonus depreciation” of 50% that can be used after the Section 179 deduction has been taken. This deduction dwindles, however, in coming years to 40% in 2018 and 30% in 2019. In 2020, the deduction will expire completely.
2. Payroll. Businesses that hire employees from certain categories, such as military veterans or those who qualified for long-term unemployment, may be eligible for the Work Opportunity Tax Credit. The PATH Act extended the credit through 2019 and added a 40% credit up to the first $6,000 in wages for businesses who hire qualified long-term unemployed individuals who have been without work for 27+ weeks.
3. Research & Development. The PATH Act permanently extends the Research and Development Tax Credit. This credit helps small businesses recover some of the costs of R&D including the expenses of obtaining a patent. Beginning in 2016, eligible small business with $50 million or less in gross receipts can claim the credit against alternative minimum tax (AMT) liability.
On top of these incentives for small businesses, the PATH Act also offers numerous individual tax breaks that may indirectly help small businesses as well. For more information, consult the IRS’s online tax center.