Once again, lawmakers waited until late in the year to pass another tax “extenders” bill.
By Mark Battersby, Contributing Editor
The new “Protecting Americans from Tax Hikes” (PATH) Act of 2015 retroactively extended quite a few tax-saving provisions, many 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.
Fortunately, among the extended provisions are many others that will benefit those in the convenience store industry.
The so-called “Cadillac tax” on the high-cost health insurance plans so many convenience store owners provide themselves and key employees will be delayed from 2018-2020. But the big deal for many retailers will be the permanent extension of the Section 179 small business expensing deduction.
The “Section 179” deduction allows a convenience store business to take an up-front expense deduction for the entire cost of equipment ranging from computers to fixtures to machinery and POS systems. The “Section 179” amount allowed as a write off in the first year—instead of slowly deducting or depreciating the cost over several years—is now permanently fixed at $500,000 per year (phased out dollar-for-dollar as expenditures begin to exceed $2 million in a year).
For the first time, PATH treats air conditioning and heating units placed in service after the 2015 tax year as eligible for first-year expensing. In an unusual move, lawmakers will allow these amounts to be permanently adjusted for inflation, beginning in 2016.
Bottom line, for the 2015 tax year and in tax years down the road, a convenience store business can each year expense and deduct up to $500,000 in equipment purchases. While the equipment can be either new or used, if it is purchased using a trade-in as part of the price, the Section 179 expense allowance is only available for the excess of the property’s cost over the under-appreciated cost or book value of the property traded in.
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% rate for the 2015-2017 tax years. It will be phased down to 40% in 2018 and 30% in 2019 before disappearing from the books.
It does allow 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.
Many convenience store operators may, however, find the bonus depreciation break is more valuable than the Section 179 deduction because this deduction is limited to the taxable income of the business with any excess carried forward. Naturally, losses generated by the 50% bonus depreciation can offset other income. They can also be carried from two years, thereby generating a refund from Uncle Sam.
COST RECOVERY FOR RETAILERS
Although the IRS recently created a unique safe harbor that allows an immediate write-off for remodeling or “refreshing” expenditures made by retail establishments and restaurants, many convenience store operators making improvements may also benefit from PATH’s new accelerated depreciation rules.
Under now-permanent rules for qualified improvements to leased property and restaurants, so-called “retail improvement property,” may qualify for a shorter 15-year recovery period. PATH has permanently extended the 15-year depreciable life for buildings and the improvements made to them.
Without this unique write-off, buildings, along with many of the improvements made to them, would be depreciated over the much longer 39-year period associated with the building itself.
EFFICIENT COMMERCIAL BUILDINGS
Another provision in PATH has extended the above-the-line deduction for the cost of energy efficient improvements made to commercial buildings through the 2016 tax year. A convenience store business is entitled to tax deductions for either new or renovated buildings that save 50% or more of projected annual energy costs for heating, cooling and lighting compared to model national standards with 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 (or designers, in the case of government-owned buildings) of new or existing commercial buildings that are constructed or reconstructed to save at least 50% of the heating, cooling, ventilation, water heating and interior lighting energy costs.
A partial deduction of 60 cents 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. The partial building improvement must reduce total heating, cooling, ventilation, water heating and interior lighting energy use by 16-2/3%.
Research expenses for convenience stores? Often singled out as a key element in PATH, the much-talked about but often ignored research and experimentation or development (R&D) tax credit has been permanently extended. It can now be used to offset the alternative minimum tax liability of a convenience store business, or to reduce the payroll tax liability of an employer.
PATH now makes permanent the much-maligned Section 41 credit for increased research expenses, a direct reduction of the operation’s tax bill rather than a deduction which merely reduces the income on which the tax bill is computed—for qualified research expenses. While market research and product testing do not qualify, all research in the laboratory sense or for experimental purposes does.
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 claim a credit against the operation’s tax bill 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 equal to a percentage of first and second year wages, up to $10,000 per employee.
FOOD INVENTORY CONTRIBUTIONS
The so-called “enhanced” deduction for food inventory has been permanently extended and expanded making every convenience store business eligible for tax deductions for donations of food inventory. PATH increases the limit on deductible contributions of food inventory from 10-15% of the taxpayer’s aggregate net taxable income.
The fair market value (FMV) of apparently wholesome food that cannot or will not be sold solely by reason of the convenience store operation’s internal standards, lack of a market or similar circumstances is determined without regard to such internal standards, etc. FMV is determined by taking into account the price at which the same or substantially the same food items—as to both type and quality—are sold by the taxpayer at the time of the contribution.
PATH retroactively extended the New Markets tax credit through 2019 and will provide up to $3.5 billion in qualified equity investments for each calendar year from 2015 through 2019. More far-reaching, Empowerment Zone tax incentives provide tax benefits for businesses and employers operating in so-called “empowerment zones.”
Empowerment zones are economically distressed areas and the tax benefits available include tax-exempt bonds, employment credits, increased expensing and gain exclusion from the sale of certain small business stock.
Obviously, because of the complexity of the new law, professional assistance may be required to maximize write-offs for the 2015 tax year as well as in planning to take advantage of all the benefits your business is entitled to in the years ahead. But, the time to plan and maximize deductions is now.