1 PATH Act of 2015 With a Focus on Depreciation and the R&D Tax CreditPurpose of the meeting Who we are Who I am David DeGrand, CPA SourceHOV | Tax Director, Business Development
2 Agenda Protecting Americans from Tax Hikes (PATH) Act of 2015Extenders Overview R&D Tax Credit Enhancements 15 Year Improvement Property Qualified Improvement Property (QIP) Rules New Bonus Depreciation Rules Section §179 Rules §179D – Energy Efficient Deduction §45L – Energy Efficient Home Tax Credit
3 Extenders Overview The PATH Act retroactively extends approximately 50 taxpayer-favorable tax extenders. Tax extenders are temporary tax provisions that are routinely extended by Congress on a one or two year basis. The previous tax extenders expired at the end of 2014.
4 Extenders Overview PERMANENT PROVISIONSAll three charitable extenders: food inventory, conservation easements, and IRA charitable rollover, and exemption for certain payments to a controlling exempt organization Research and Development Credit (base credit, 14% ASC, AMT and Payroll provisions) Both S corporation provisions: 5-year built in gains tax and charitable contributions Section 179 expensing ($500,000 and $2 million limits, no limitation on real estate) Mass transit parity State and local sales tax deduction Deduction for teacher classroom expenses (indexed for inflation) 15-year depreciation for qualified leasehold improvements, qualified restaurant improvements, and qualified retail improvements Enhancements since 2001: Earned Income Tax Credit, Additional Child Tax Credit, and American Opportunity Tax Credit International tax relief: Active finance exception Two provisions for mutual funds: treatment of RIC dividends for foreign investors and subjecting RICs to FIRPTA Deduction for teacher classroom expenses 100% exclusion on gains from sale of small business stock FIVE-YEAR PROVISIONS Bonus depreciation (50% for , 40% in 2018, 30% in 2019) Low-Income Housing Tax Credit extenders: the 9% floor and military housing allowance International tax relief: Controlled foreign corporation look-through rule Employer wage credit for employees on active duty (expanded for all employers) The New Markets Tax Credit The Work Opportunity Tax Credit
5 Extenders Overview TWO-YEAR PROVISIONSTemporary increase in rum cover over Exclusion of discharged mortgage debt relief from gross income (modified) American Samoa economic development credit Non-business energy property credit Mortgage insurance premiums treated as qualified residence interest Alternative fuel vehicle refueling property credit Above the line deduction for qualified tuition and related expenses 2-wheeled plug-in electric motor credit Second generation biofuel producer credit Indian Employment Tax Credit Biodiesel and renewable diesel incentives credit Railroad Track Maintenance Credit (modified) Indian Coal Production Tax Credit (modified) Mine Rescue Team Training Credit Credit for facilities producing energy from certain renewable resources Qualified Zone Academy Bonds Race horses: 3-year recovery period Credit for energy-efficient new homes Motorsports complexes; 7-year recovery period Special allowance for second generation biofuel plant property Accelerated depreciation for business property on Indian reservations (modified) Energy efficient commercial buildings deduction Election to expense mine safety equipment Special rule for sales or dispositions to implement FERC or State electric restructuring policy for qualified electric utilities Film and television expensing (modified to include live theater) Credits relating to alternative fuels Section 199 deduction for activities in Puerto Rico Credit for new qualified fuel cell Empowerment Zone tax incentives (modified)
6 What is the R&D Tax CreditWho Qualifies for the Credit? Companies that are involved in manufacturing, engineering, software development, technical services. What are These Companies Doing that Qualifies? Improving and Product or Process, Using Technology, Looking for New Information, Experimenting. Where Does the Credit Come From? Salaries, Supplies, Contract Labor
7 Who Qualifies for the CreditBy Sector Total # Claims % of Claims Totals 15,873 Agriculture, forestry, fishing, and hunting 59 0.4% Mining 81 0.5% Utilities 67 Construction 240 1.5% Manufacturing 6,219 39.2% Wholesale and retail trade 1,017 6.7% Transportation and warehousing 58 Information 1,583 10.0% Finance and insurance 304 1.9% Real estate, rental, and leasing 82 Professional, scientific, and technical services 5,280 33.2% Management of companies (holding companies) 403 2.5% Administrative/ support and waste management services 148 0.9% Various services 278 1.8% Proprietary & Confidential
8 Who is claiming the R&D credit?Sales 2012 # of credit claims Under $10,000,000 8,105 $10,000,000 under $50,000,000 3,399 $50,000,000 under $250,000,000 2,073 $250,000,000 or more 2,295 Total 15,873 Source: Statistics of Income Division: 2012 Corporate Returns Data Total credits in 2012 $10.8 billion Average credit size for companies under $10,000,000 is $89,800 Average credit size for companies $10,000,000 - $50,000,000 is $129,500 Who are the companies claiming the credit More than half are $10M more than 2/3 are $50M and less. Sweet spot. CPA majority of their clients. Company with $10M in sales, $900K with margins of 10% Things they are already doing. Don’t naturally think about the R&D credit No licensed engineers or laboratories. Just trying to improve products and processes. Proprietary & Confidential
9 Qualifying R&D ActivitiesThe R&D tax credit provides permanent benefits to drive down effective tax rates and generate cash flow. Federal and state incentives are available to companies that devote time and resources to developing new or improved products or processes. Qualifying activities include: concept development design engineering software development experimenting with new materials designing tools, molds and fixtures prototyping and testing manufacturing processes Proprietary & Confidential
10 Where Does the Credit Come From?Salaries and Wages Typically largest component W-2 Box 1 Wages Three levels of research: Direct Research Direct Supervision of Research Direct Support of Research Supply Costs Used or destroyed during the qualifying activities Includes costs of prototypes ultimately sold Contractor Costs 65% of qualifying costs eligible Credits generally are 5% - 6.5% of QREs One of the temporary provisions with the most recent expiration date of 12/31/14. Important is looking at extending for 2015 and 2016. Talk of permanence and sweeteners such as reducing AMT and make available to true start up company Proprietary & Confidential
11 R&D Credit is Permanent / EnhancementsEffective January 1, 2015, the R&D tax credit became permanent. Effective January 1, 2016: The credit will be able to offset Alternative Minimum Tax (AMT) for eligible small businesses, companies with less than $50 million in gross receipts. Start-up companies, whether corporations or partnerships, can apply the credit to offset up to $250,000 in payroll taxes. Start-ups are defined as businesses with less than $5 million in gross receipts in the current year and less than five years of historical gross receipts. One of the temporary provisions with the most recent expiration date of 12/31/14. Important is looking at extending for 2015 and 2016. Talk of permanence and sweeteners such as reducing AMT and make available to true start up company Proprietary & Confidential
12 What Is Cost Segregation:What Does Cost Segregation Do? Identifies Building Components and Site Improvements with Shorter Depreciable Lives. What Are The Benefits? Accelerate Depreciation Which Creates Cash Flow. What Qualifies? Site/Land Improvements, Finish-Out, Mechanical, Electrical When Does It Make Sense? New Construction, Renovations/Leasehold Improvements, Acquisitions, Existing Real Estate
13 §1250 Property Associated with Buildings & Real Estate15 YEAR IMPROVEMENT PROPERTY 15-year qualified leasehold improvement property (QLHI) , qualified restaurant property (QRP) and qualified retail improvement property (QRIP) Path retroactively extends & makes permanent the inclusion of QLHI, QRIP & QRP in the 15-year MACRS class for property placed in service after Dec. 31, 2014 Under pre-Act law, the 15-year write-off didn't apply to property placed in service after 12/31/14. §1250 Property Associated with Buildings & Real Estate Non-Residential Real Property 39 Year SL Residential Real property 27.5 Year Site Improvements 15 Year 150%DB Qualified Leasehold Improvements (QLHI) Qualified Retail Improvements (QRIP) Qualified Restaurant Improvements (QRP) PATH
14 Qualified Improvement Property (QIP)Begins in 2016 Improvements placed in service after original 39-year building; Rules that are similar to Qualified Leasehold Improvement (QLHI) property: Interior portion of a building; Not an elevator or escalator; Not the interior structural framework of the building. Rules that do not follow (QLHI): 3-year rule Lease rule Common area rule QIP does not define a type of §1250 property. It defines which §1250 property receives bonus depreciation QIP bonus applies to all QLHI, all QRIP, and most QRP. It applies to some §1250 improvements that are not QLHI, QRIP or QRP
15 Qualified Improvement Property (QIP)QIP Example’s Assumptions; Improvements placed in service after original nonresidential real property building; Interior portion of a building; Not an elevator or escalator; Not the interior structural framework of the building. The building does not qualify when initially placed into service; but, most subsequent interior improvements would qualify, such as; HVAC, Electrical, Partition walls, Doors, Ceilings, Ceramic Tile, Etc…
16 50% 40% 30% 0% Bonus Depreciation% Bonus Depreciation is the same 2018 Bonus depreciation drops to 40% 2019 Bonus depreciation drops to 30% It disappears after 2019 Starting in 2016, QLHI bonus depreciation is replaced by Qualified Improvement Property bonus depreciation. 50% 40% 30% 0% 2018 2019 2020+
17 New Section 179 Rules Retroactive to 2015: In 2016:Permanently extends the small business expensing limitation and phase-out amounts in effect from 2010 to 2014 ($500,000 and $2 million, respectively). These amounts currently are $25,000 and $200,000, respectively. The special rules that allow expensing for computer software and qualified real property (QLHI, QRP, and QRIP) also are permanently extended. In 2016: $250,000 cap on expensing Qualified Real Property (QLHI, QRP, and QRIP) eliminated Modifies the $500,000 and $2 million business expensing limitation and phase-out by indexing both for inflation Air-conditioning and heating (read: portable) units now qualify for regular 179 Taxpayers can now always use amended returns to make or revoke 179 elections
18 $2 million + inflation adj.New Section 179 Rules Year QRP Deductible? Expensing Limit Phaseout Starts At QRP Limit 2004 No $100,000 $410,000 2005 $102,000 $420,000 2006 $105,000 $430,000 2007 $125,000 $500,000 $250,000 $800,000 Yes $2 million 2016+ $500,000 + inflation adj. $2 million + inflation adj. No separate limit
19 Indian Reservation PropertyExtends accelerated depreciation for qualified Indian reservation property to property placed in service during 2015 or Previously, Indian Reservation Property was for property placed into service after 1993 and before New irrevocable election out of Indian reservation depreciation on a class-by-class basis starting in 2016 Property Class Recovery Period 3-Year Property 2 Years 5-Year Property 3 Years 7-Year Property 4 Years 10-Year Property 6 Years 15-Year Property 9 Years 20-Year Property 12 Years Nonresidential Real Property 22 Years
20 Section 45L Section 45L New Energy Efficient Home Tax CreditExtended through 2016 Credit is generally $2,000 per qualifying residence. Claimed by the person who constructed the qualified energy efficient home. Qualification is based on the 2006 International Energy Conservation Code (IECC) and requires a 50% reduction in energy usage. Must be for a dwelling that includes a residence, apartment building, units within a condominium or a houseboat. Dwelling must be complete after 8/8/2005 before 12/31/2016
21 179D Energy Efficiency DeductionEnergy Policy Act of 2005 (Notice ) ≥ 50% over ASHRAE baseline = $1.80 Lighting ≥ 25% = $.60 HVAC ≥ 15% = $.60 Envelope ≥ 10% = $.60 Modeling Required Interim Lighting Allowed EPAct 2008 update (Notice ) Designers of Government Buildings
22 About SourceHOV Tax Founded in 1983 as LIFO Systems Provide specialty tax consulting solutions nationwide to end clients through our CPA firm partners Perform thousands of LIFO calculations and hundreds of Cost Segregation studies, R&D credit calculations and 179D Energy Efficient studies annually Main market differentiator is our technical expertise and thorough upfront evaluation Project based, turnkey consulting billed at a fixed fee Estimate of benefit and ROI quantified prior to engagement This is our agenda today. Read it. Proprietary & Confidential
23 4150 International Plaza Ste. 650, Fort Worth, TX 76109 David DeGrand, CPA 4150 International Plaza Ste. 650, Fort Worth, TX 76109 (Office) (Cell) closeSo there is your update for R&D, cost segregation, LIFO and 179D. 4 new regs for R&D, 3 of which directly affect taxpayers in a good way. The TPR have been difficult but do now allow taxpayers to write off section 1250 property that has been disposed of or retired. LIFO is still around and has been for 80 years, still one of most impactful tax ideas around. 179D has the potential to expand it’s benefit for both commercial building owners and architect/engineers. Let me know if you ever have any questions or need any information concerning our tax offerings. Thank you. Proprietary & Confidential