Once again, lawmakers waited until late in the year to pass yet another “extenders” bill. The “Protecting Americans from Tax Hikes (PATH) Act of 2015” passed late in December 2015, is causing many professional snow removal and ice management professionals to scramble to take advantage of tax breaks for 2015 transactions, change or correct already-filed 2015 tax returns and make the moves necessary to reap the benefits of PATH in 2016 and later.
The so-called “Cadillac” tax on the high-cost health insurance plans so many snow removal contractors provide themselves and key employees will be delayed from 2018 to 2020. And beginning with the Forms W-2, W-3, and returns for reporting non-employee compensation (e.g., Form 1099-MISC) filed for the 2016 tax year, PATH will require filing before January 31.
The so-called “Section 179” deduction allows a snow and ice removal business an up-front expense deduction for the entire cost of equipment ranging from computers to furniture to vehicles and machinery. The amount allowed as a write off in the first year (instead of slowly deducting or depreciating over several years), is now permanently fixed at $500,000 per year (phased out dollar-for-dollar as expenditures begin to exceed $2,010,000 in a year).
Beware of the often-ignored trap when trade-ins are involved. Although either new or used equipment purchases can be expensed and deducted, if purchased using a trade-in as part of the price, only the portion of the purchase price in excess of the undepreciated book value of the property traded in will qualify for the Section 179 first-year write-off or bonus depreciation.
A bonus write-off.
Originally created as a short-term stimulus measure, bonus depreciation is back albeit phased out over a five-year period. Bonus depreciation, which permits the immediate deduction of any business equipment expenses, rather than a depreciated tax benefit over time, has been extended at the former 50 percent rate for the 2015-2017 tax years, phased down to 40 percent in 2018 and 30 percent in 2019.
Making it even semi-permanent allows businesses which spend heavily on equipment, machinery and other business property to reap large up-front tax breaks. Overall tax savings are predicted to be $281 billion over a 10-year period.
Generally, any snow removal business – or its owner – can change their mind about a previously filed tax return within three years.
Many snow and ice removal operations will find the bonus depreciation break may be more valuable than the Section 179 deduction because the Section 179 expensing deduction is limited to the taxable income of the business with any excess carried forward.
Naturally, losses generated by the 50 percent bonus depreciation can offset other income. They can also be carried back for two years, thereby generating a refund from Uncle Sam.
Energy efficient buildings.
A provision in PATH extends through the 2016 tax year, the above-the-line deduction for the cost of energy efficient improvements made to commercial buildings.
A snow removal business can get tax deductions for new or renovated buildings that save 50 percent or more of projected annual energy costs for heating, cooling and lighting compared to model national standards, and partial deductions for efficiency improvements to individual lighting, HVAC and water heating, or envelope systems.
The tax deduction amount is up to $1.80 per square foot and is available to owners or tenants of new or existing commercial buildings. A partial deduction of $0.60 per square foot can be taken for improvements made to one of three building systems – the building envelope, lighting or heating and the cooling system.
Energy efficient fleets.
Those snow removal professionals thinking green will enjoy the tax credit for alternate fuel refueling “property” that has been extended as has the biodiesel and renewable diesel incentives. The existing $1.00 per gallon tax credit for biodiesel and biodiesel mixtures has been extended through 2016. Also extended through 2016 is the 50 cents per gallon alternative fuel tax credit and alternative fuel mixture tax credit.
And don’t forget the credit for purchasing qualifying new fuel cell motor vehicles. It too, has been extended through the 2016 tax year. The new extended rules make a tax credit of between $4,000 and $40,000, depending on the weight of the vehicle, available on the purchase of such vehicles.
work opportunity credit.
PATH retroactively extended and greatly expanded the Work Opportunity Tax Credit (WOTC) through the 2019 tax year. The WOTC allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of first-year wages up to $6,000 per employee ($3,000 for qualified summer youth employees).
In situations where the employee is a long-term family assistance (LTFA) recipient, the WOTC is a percentage of first and second year wages, up to $10,000 per employee.
While the maximum WOTC for a snow removal and ice management business hiring a qualifying veteran is generally also $6,000, it can be as high as $12,000, $14,000 or $24,000, depending on factors such as whether the veteran has a service-connected disability, the period of his or her unemployment before being hired, and when that period of unemployment occurred relative to the WOTC-eligible hiring date.
In other words, the amount of WOTC employers can claim depends upon the target group of the individual hired, the wages paid to that individual in the first year of employment, and the number of hours that individual worked. There is also a maximum tax credit that can be earned.
For the long-term Temporary Assistance for Needy Families (TANF) target group only, the credit is available to employers who hire members of this group for up to a two-year period.
Many professional snow removal and ice management professionals are scrambling as a result of lawmakers.
In the first year, the employer may claim a tax credit equal to 40 percent of the first-year wages, up to the maximum tax credit, if the individual works at least 400 hours.
In the second year, the employer may claim a tax credit equal to 50 percent of the second-year wages, up to the maximum tax credit, if the individual works at least 400 hours.
For all other target groups, the credit is available to employers who hire members of these groups, based on the individual's hours worked and wages earned in the first year.
If the individual works at least 120 hours, the employer may claim a tax credit equal to 25 percent of the individual's first year wages, up to the maximum tax credit.
If the individual works at least 400 hours, the employer may claim a tax credit equal to 40 percent of the individual's first year wages, up to the maximum tax credit.
gains of s corporations.
As the economy improves, many snow removal businesses are replacing much of their equipment and other assets. Unfortunately, many are just discovering a corporate-level tax is being imposed at the highest marginal rate (currently 35 percent) on the so-called “built-in gain” of a business operating as an S corporation. That built-in gain is usually gains that arose prior to the snow removal operation’s conversion from a regular ‘C’ corporation to an S corporation, and arises when assets are sold. PATH retroactively and permanently provides that, for determining the net recognized built-in gain, the recognition period is a 5-year period – the same period that applied to tax years beginning in 2014.
In other words, the built-in capital gains of a corporation which has become an S-corporation must be held for five years in order to avoid a conversion capital gains tax. Permanently reducing the S corporation recognition period for the built-in gains tax will make it easier for incorporated businesses to become Subchapter-S corporations and more fluidly change the status of their business entity to respond to changing market conditions.
Correcting or amending any tax return because of errors, omissions, mistakes, overlooked deductions or ignored retroactive law changes is both necessary and encouraged by the IRS.
Generally, any snow removal business – or its owner – can change their mind about a previously filed tax return within three years from the time the return was filed, or within two years from the time the tax was fully paid, whichever is later. It’s seven years if the refund claim involves the deductibility of bad debts or worthless securities.
Individuals, sole proprietors, etc., use Form 1040X, Amended Individual Tax Return. A corporation that filed Form 1120 uses Form 1120X, Amended U.S. Corporation Income Tax Return, to file an amended return, while S corporations and partnerships check a box on the Form 1120S or Form 1065.
There are, of course, quite a few more tax-saving provisions, many of them quite narrow in scope such as those for film and theater producers, NASCAR racetrack owners, racehorse owners, and rum producers in Puerto Rico and the Virgin Islands, all included as part of PATH.
The complexity, the fact that many of its provisions apply to transactions occurring in 2015 and the uneven expiration date for many of these tax benefits makes professional assistance almost mandatory.
But, which of the provisions will best help your snow removal and ice management business reap its share of the $622 billion in tax savings?