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Tax clarity for entrepreneurs in 2016

At the end of 2015, Congress passed a law that eliminated the need for end-of-the-year brinkmanship over tax extenders. The Protecting Americans From Tax Hikes Act did not contain much that was new, but it did offer clarity and more certainty.

From the research and development credit to writing off business expenses, this post will discuss some of the changes that may affect your business decisions this year.

Research and development credit

This now permanent credit is not only for medical research firms or for scientific companies. It can apply for a bakery doing research into new pastry recipes. A start up developing new software or apps might also be able to take advantage of the credit.

A company can use the R & D credit to write off labor, ingredient and equipment costs that go into developing an innovation. The Act broadened the application of the credit, which should allow more companies to take advantage of the credit. 

Section 179 write-offs

The PATH Act made the $500,000 annual limit on these business deductions permanent. A construction business may use this deduction to write off the costs on a new bulldozer or cement mixer. It would also apply for the purchase of new desk lamps.

For those smaller purchases, another option is to expense tangible property. Internal Revenue Service guidance from last November allows businesses to immediately deduct up to $2,500. You need to keep invoices to substantiate these purchases in the case of a IRS tax audit. This should streamline and simplify deductions of computers and other office equipment.

The amount of income coming in for a start-up affects these decisions. If no income is yet coming in, stretching out deprecation can limit tax exposure once income finally starts flowing.

These are just a couple highlights of the things that will impact tax planning for entrepreneurs in 2016. Whether you have questions about limiting tax exposure or how to respond to an IRS tax audit, an experienced tax attorney can offer guidance.

Source: New York Times, “For Small Businesses and Entrepreneurs, Some Welcome Clarity,” Paul J. Lim, Feb. 19, 2016

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