You may be eligible for tax savings under the PATH Act of 2015. But you’ll have to make sense of the bill’s complexities. We help you navigate the fine print.
Late last year, federal lawmakers passed another “extenders” bill—and it contains good news for jewelers. The new “Protecting Americans from Tax Hikes (PATH) Act of 2015” retroactively extends the 50 or so temporary tax provisions that are routinely extended on a one- or two-year basis, including a shorter write-off period for retailers who remodel or fix up their establishments.
“It helps jewelers, whether they rent or own their retail space, to update their stores to stay competitive,” says David J. Bonaparte, president and CEO of Jewelers of America.
Other provisions in the tax extenders package provide faster write-offs for not only store improvements but also the cost of fixtures, display cases, furniture, and point-of-sale and security systems.
JCK breaks down the intricacies of the bill so retailers can reap the benefits. (And remember, this is meant only to be an overview. Talk to your tax professional to find out how this applies to your business.)
First-Year Write-Offs
The Section 179 deduction allows a jewelry business an up-front expense deduction for the entire cost of business assets, including computers, showcases, diamond segregators, and casting machines. 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 million per year). For 2016, that expenditures figure grows to $2.1 million, due to inflation indexing, and is likely to increase down the road.
A Bonus Write-Off
Originally created as a short-term stimulus measure, bonus depreciation is back, though it will be phased out over a five-year period. Bonus depreciation permits the immediate deduction of business equipment expenses, rather than a depreciated benefit over time. It 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.
Many jewelers will find the bonus depreciation break more valuable than the Section 179 deduction, which 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. Only bonus depreciation can be carried back for two years, thereby generating a refund from Uncle Sam.
Improvements: Leased and Retail
Many retail jewelry stores making store improvements will benefit from PATH’s new accelerated depreciation rules. “The measure enables retailers to continue to write off improvements on stores over a period of 15 years, instead of the 39 years that previously had been mandated,” says JA’s Bonaparte.
That’s right: PATH makes permanent a 15-year depreciable life for small-business buildings and improvements. Without this unique write-off, buildings and many improvements would be depreciated over the much longer 39-year period associated with the building where the improvements are made.
Energy-Efficient Commercial Buildings
Liz Schlauch, co-owner of Barany Jewelers in Brunswick, Ohio, is all in favor of saving energy costs and says she is interested in the PATH provision that extends, through the 2016 tax year, the above-the-line deduction for the cost of energy-efficient improvements to commercial buildings. A retail jeweler 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 with model national standards, and partial deductions for efficiency improvements to individual lighting, HVAC (heating, ventilation, air conditioning) and water heating, or envelope systems.
The tax-deductible amount is up to $1.80 per square foot and is available to both owners or tenants of such commercial buildings. 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 cooling systems. The partial building improvement must reduce total HVAC, water heating, and interior lighting energy use by 16.66 percent (the 50 percent goal spread equally over the three systems).
The Work Opportunity Tax Credit
The PATH Act retroactively extends and greatly expands 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 recipient, the WOTC is a percentage of first- and second-year wages, up to $10,000 per employee.
Ken Corey, owner of Dubes Jewelry in Janesville, Wis., says he was surprised to learn that while the maximum WOTC for a retail jewelry 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 occurred relative to the WOTC-eligible hiring date.
The Built-In Gains of S Corporations
As the economy improves, many retail jewelers are opting to replace equipment and other business assets. Unfortunately, however, many are 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 jewelry business operating as an S corporation. That built-in gain usually refers to gains made prior to the retailer’s conversion from a regular C corporation to an S corporation, and arises when assets are sold. The PATH Act retroactively and permanently extends the five-year period for recognizing built-in gains—the same amount of time that applied to tax years beginning in 2014.
In other words, the built-in capital gains of a corporation that 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’s 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 evolving market conditions.
Small-Business Stock and More
Qualified small-business stock is often hailed as one of the best tax-break opportunities around. It allows investors to ignore 100 percent of their capital gain when selling this type of stock after five years.
“If I were in a position or needed to raise capital, small-business stock would seem to be an excellent option,” Barany Jewelers’ Schlauch says.
The PATH Act has extended the 100 percent exclusion from capital gain that was allowed on the sale or exchange of qualified small-business stock held for more than five years by non-corporate investors.
Additionally, the so-called Cadillac tax that was supposed to start in 2018 has been postponed. That means businesses offering expensive health insurance will not have to pay the Cadillac tax for those plans until 2020. (Of course, many employers want the tax, which amounts to a 40 percent levy on the cost of benefit plans above a certain level, repealed altogether.)
All in all, the PATH Act has reduced the uncertainty that formally surrounded quite a few of the tax breaks that benefit so many jewelry retailers. Now, not only can they get an early start on tax planning, but they can also salvage overlooked write-offs from the 2015 tax year. Hooray!
Saved by the Bill
To reap your share of the estimated $622 billion in tax savings under the Protecting Americans from Tax Hikes (PATH) Act, take these steps:
1. Seek professional advice. PATH is so complex that help is virtually mandatory.
2. Amend all already-filed 2015 tax returns to take advantage of the many retroactive provisions.
3. Consider changing accounting methods or even the entity of your business to qualify for some provisions.
4. Keep tabs on your tax situation; taxes are not a once-a-year event.
5. Remember that tax savings should never be the sole reason for any business transaction. —MEB
Top: Paper Boat Creative/Getty Images; above: DNY59/Getty Images