What Obama’s new bipartisan tax law means for physicians
On December 18, 2015, President Obama signed the Protecting Americans from Tax Hikes (PATH) bill into law, a bipartisan agreement that extended many tax provisions either two or five years, and made several other provisions permanent. What does this mean? For the first time in many years, business owners are able to forecast and plan with some idea of what the tax affect may be for an extended horizon.
Twenty-two provisions were made permanent, four provisions were extended five years through 2019, and another 30 were extended two years through 2016. This law extends both business and individual provisions. This article will summarize the provisions most likely to affect physicians, both at a practice and individual level.
Three items were made permanent that will affect many physician practices:
Increased Section 179 expensing;
A 15-year depreciable life for improvement made to leaseholds; and,
Five-year holding periods for built-in gain taxes when C-corporations convert to S-corporations.
Section 179 expenses
Section 179 expense is an election that can be used to expense tangible personal property in the year it is purchased instead of depreciating it over the course of its useful life. While the expense amount has increased since 2002 from $25,000 to a $500,000 limit, it has always been treated as a temporary extender in any tax bill. Now, beginning January 1, 2015 forward, this is a permanent item. Business owners can elect to expense up to $500,000 of asset purchases if no more than $2,000,000 in assets were placed in service that year. In short, it is a huge win for small business owners like physician-owned practices.
A second item that has been made permanent is the fifteen-year depreciation period for leasehold improvements. Former law required these to be depreciated over thirty-nine years. Improvements made to a leasehold in a buildings that is three years old or older and are not structural or enlargements of the building will qualify. As most physician owned practices do not own the building inside the legal entity, this allows for faster expensing of the cost of the leasehold improvements. However, a caveat to this is it does not apply if the lessor/lessee agreement is between related parties.
Finally, the third item that has been made permanent is the holding period for the built-in gains tax when a C-corporation converts to an S-corporation. When a C-corp converts to an S-corp, a period exists for how long the S-corp must maintain ownership of the assets it owned at the time of conversion. If these assets are sold within that period for a gain, a tax of 35% (the C-corp tax rate) would be assessed on the gain. Previously, that holding period has been ten years. Prior law changes have shortened this to seven years and then five, but at the end of 2014, the law expired and the period reverted back to ten years. Under PATH, the holding period is now five years and permanent law. This is a huge win for practices that have converted to an S-corporation and own many pieces of equipment, or those practices that own the office space they use to operate.
Additionally, other provisions were not made permanent, but have been extended. One popular business deduction that fits into this category is bonus depreciation, which was extended through 2019. Property purchased that is new (i.e., cannot be used) has a depreciation life of less than 20 years, off-the-shelf computer software, and qualified leasehold improvements can all get bonus depreciation. Property placed in service in 2015, 2016, and 2017 may have bonus depreciation of 50%. Property placed in service in 2018 is allowed 40%, and property placed in service in 2019 is allowed 30%. Taxpayers are allowed to take both section 179 and bonus depreciation in the same year; it is no longer one or the other.
Several popular individual tax deductions were also extended including deductions and credits. Some items that were made permanent are the child tax credit, the deduction for teachers purchasing items for their classrooms, the deduction for state and local sales taxes, and the ability to have tax free transfers from an IRA to charity. Items that were extended two years through 2016 are forgiveness from debt relief on a principal residence, a deduction for mortgage insurance premiums, and the deduction for qualified tuition and related expenses. It should be noted that many of these provisions do face income limitations, and will be phased out or disallowed if income exceeds certain thresholds.
In summary, this law is very friendly and beneficial for taxpayers. Please contact the DoctorsManagement accounting team to make sure you are taking advantage of these opportunities to the fullest extent possible.
— Nick Meals, CPA, CVA The author is a Management Consultant at DoctorsManagement.