If you're a business owner and find yourself dreading the first few months of the year because of the hassle and expense of preparing your income taxes, you may be happy to hear about some positive changes made by Congress in late 2015. While some of these provisions were simply a codification of temporary measures passed during previous years, the permanency of these changes can help you significantly increase the accuracy of your business forecasting for the years ahead. Read on to learn more about these changes, as well as some other small business-specific tax breaks that can help you slash your annual bill.
What small business tax law changes were recently made by Congress?
With the economy starting to show signs of weakness again, Congress seems determined to help small businesses grow rather than handicap them with tentative and uncertain tax codes. In the Protecting Americans from Tax Hikes (PATH) legislation passed in December 2015, Congress did the following:
- $500,000 expensing limit
Prior to the recent changes, the permanent limit for writing off or deducting certain capital expenses was an astoundingly low $25,000. This meant that businesses that regularly incurred expenses far beyond this threshold weren't permitted to deduct amounts over $25,000, resulting in a much higher tax bill than an individual in a similar financial situation would pay. Many individuals would delay purchasing equipment or assets that were likely to cost more than $25,000, like heavy-duty appliances, vehicles, or even a commercial HVAC replacement. While this limit had been temporarily increased to provide some relief to business owners (and some encouragement to reinvest cash back into the community), the transient nature of this extension made planning expenses difficult.
Under the PATH legislation just passed, you'll now be able to deduct up to $500,000 in ordinary and necessary business expenses each year. This permanent increase in the expensing limit should allow you to comfortably invest in some capital expenses without sacrificing your bottom line, and may be the push you need to expand your customer base.
- Accelerating depreciation
There are a few situations in which accelerating the use of alternative minimum tax (AMT) credits in place of bonus depreciation on a recently-purchased building can benefit you -- especially if you've invested a significant portion of your existing assets in this purchase and need to recoup these funds as quickly as possible. Bonus depreciation allows you to deduct certain capital expenses on a very accelerated schedule, depreciating 50 percent of the basis of the property during the first year you purchase it. The PATH legislation provided some extensions to the ability to accelerate AMT credits for property you purchase and begin using between now and 2019. As with the change to the expensing regulation, knowing that you'll be able to continue to claim AMT credits equivalent to 50 percent of your basis for the first year in which your capital asset is in service can help you take the plunge into capital ownership.
What are some other tax breaks for the small business owner?
While your accountant or tax professional should be able to help you take advantage of the most common business tax deductions, from mileage to employee benefits to energy-efficient building improvements, there are a few deductions that you may be able to take full advantage of by getting started early in the tax year.
- Dedicated home office deduction
If you tend to do work from home more often than not, downsizing your corporate office and switching to a home office could allow you to gain a valuable home office deduction. If you have a dedicated space in your home to use for business, you'll be able to cut your housing costs by deducting a portion of your mortgage, utilities, and even cell phone bill.
- Personal computers and electronics
Capital expenses need not be limited to the boring -- that smartphone you purchased to help keep on top of your work emails or the laptop you often use for on-the-go orders can be deducted even if you occasionally use it for personal correspondence.
If you need any help understanding how these changes will impact your business, contact a small business attorney in your area.