The U.S. Tax Code has a long history of tax incentives for manufacturers and other business enterprises. However, as is typical, these incentives tend to come and go at the whim of Congress.
Machinery and Equipment
The purchase of machinery and equipment has been the frequent recipient of tax incentives. Currently, the Section 179 deduction is available for small businesses purchasing less than $200,000 in qualifying equipment for the year 2015.
The law allows the company to expense up to $25,000 of these purchases in the year of purchase, in addition to the regular depreciation deduction. Until 2014, the deduction could be up to $500,000 on purchases of up to $2,000,000. But this has not been extended by Congress at this point. It seems likely that the 2014 limits will be extended into 2015, so businesses should be prepared to make last minute purchases in 2015 should Congress take action on this issue.
Similar to the Section 179 deduction is bonus depreciation. This is an extra amount of depreciation that may be deducted in the year of purchase. At various times, it has been as high as 100 percent. However, the most recent bonus depreciation was extended by Congress only through the end of 2014. Some form of bonus depreciation is likely to be enacted by Congress for 2015 and years following.
The Modified Accelerated Cost Recovery System (MACRS) has been in place for a number of years and allows accelerated depreciation of qualifying assets. Depreciation can be for as few as three years or as long as 39 years depending on the nature of the asset.
Another part of the expired provisions as of the end of 2014 was 15-year depreciation on leasehold, retail improvements and restaurant property. Hopefully, this will be included in the extenders package. Accelerated depreciation allows the cost to be recovered in a shorter time frame than would occur under straight-line depreciation. Real estate, however, is depreciated under straight line.
The United States has not had a great deal of unfavorable history in the area of export improvements. A number of these incentives have been enacted over that last 45 years, only to be struck down as in violation of various international agreements.
Two incentives remain in place, however. The Interest Charge – Domestic International Sales Corporation (IC-DISC) – is designed for smaller companies, allowing them to defer profits on the first $10 million of export sales.
In a nutshell, an S Corporation or partnership forms a tax-exempt subsidiary as an IC-DISC. A commission on sales is paid by the corporation to the IC-DISC, which then pays a dividend to the parent. The parent passes the dividend on to the shareholders. Due to the limited eligibility for the IC-DISC, it is not widely used.
The Domestic Production Activities Deduction (DPAD) allows a business a credit of 9 percent of revenue from qualified production activity income (QPAI) against income tax. Even though designed as an export incentive, companies not involved in exporting may use it.
The credit is for certain production activities undertaken in the United States. The deduction is limited to 50 percent of W-2 wages paid. The definition of what qualifies is somewhat detailed, so competent counsel should be sought in determining if the company is eligible for the credit. In addition, the calculation of the credit is somewhat complex.
Small Business Health Care Tax Credit
The Small Business Health Care Tax Credit was designed to assist small businesses with the costs of providing health care for its employees. The credit can be as much as 50 percent of the cost of providing health insurance coverage for employees.
To qualify for the credit, the company must pay for at least half of the cost of health insurance coverage for employees and have fewer than 25 full-time equivalent employees with average compensation under $50,000. Additionally, the insurance must be purchased through the Small Business Health Options Program (SHOP), otherwise known as an exchange.
The full list of tax credits available in the United States is quite extensive. Some have broad applicability, while others, such as the Orphan Drug Credit, apply to a rather narrow business segment.
Some credits have expiration dates but are frequently renewed. Others have no stated expiration date. The world of tax credits available to businesses is in a constant state of flux.
To be certain you are taking full advantage of credits available to you, consult with your CPA for the latest information available.