The U.S. House of Representatives passed H.R.636, “America’s Small Business Tax Relief Act of 2015” on February 13, 2015, which would make permanent increased expensing provisions that expired at the end of 2014. The bill goes to the Senate next for consideration, before making its way to the President.
H.R. 636 packages three permanent tax breaks. The legislation grants small businesses quicker cost recovery of investments in certain depreciable business assets for taxable years beginning after December 31, 2014. H.R. 636 eliminates the significant reduction in the benefit of expensing that may result from the expiration of these temporary expensing levels after 2014. Making the 2014 levels permanent provides much-needed certainty for small businesses and farms, which have struggled through the economic challenges of the past seven years, enabling them to make investments critical to the growth and expansion of their businesses and to hire new employees. H.R. 6 36 also provides certainty by permanently treating investments in computer software, heating and air conditioning units, and certain investments in real property, as property eligible for expensing (the bill eliminates the exclusion of air conditioning and heating units from property eligible for the expensing allowance).
H.R. 636 provides that the maximum amount that a taxpayer may expense, for taxable years beginning after 2014, is $500,000 of the cost of qualifying property placed in service for the taxable year, with such amount reduced by the amount by which the cost of such qualifying property exceeds $2,000,000. An identical temporary provision applied for tax years 2010 through 2014, but it expired for tax years beginning after December 31, 2014, causing these amounts to revert to $25,000 and $200,000, respectively. Under H.R. 636, both the $50,000 and $2,000,000 limits would be indexed for inflation beginning in taxable years after 2015. H.R. 636 also treats off-the-shelf computer software, qualified real property, and air conditioning and heating units placed in service in taxable years beginning after 2014 as eligible for expensing. The taxpayer is allowed to revoke an election to expense section 179 property without first obtaining consent from the Department of the Treasury.
“America’s Small Business Tax Relief Act of 2015” makes the reduced recognition period (five-year) for built-in gains of an S corporation permanent. A corporate level built-in gains tax, at the highest marginal rate applicable to corporations (currently 35 percent), is imposed on an S corporation’s net recognized built-in gain that arose prior to the conversion of the C corporation to an S corporation and is recognized by the S corporation during the recognition period, (i.e., the 10-year period beginning with the first day of the first taxable year for which the S election is in effect).
The legislation makes permanent certain rules regarding basis adjustments to stock of S corporations making charitable contributions of property. The bill corrects a disparity between the treatment of charitable contributions made by S corporations and partnerships, which can result in a future tax liability for shareholders of an S corporation that donates appreciated property. For contributions made in taxable years beginning after December 31, 2013, the amount of the reduction is the shareholder's pro rata share of the fair market value of the contributed property. The legislation levels the playing field between S corporations and other types of business and provides that a shareholder's basis in his S corporation stock is decreased by his pro rata share of the adjusted basis of any charitable contributions made by the S corporation, rather than the fair market value.