Blog: US Tax Updates

March 7th, 2016 déduction pour petite entreprise au Québec

The following are some of the tax changes happening south of our border. Such changes are not usually part of the mainstream news here in Canada but may have an impact on Canadian businesses operating in the US, US citizens and resident individuals, and Canadians owning property in the US.

PATH Act of 2015

At the end of 2015, the US president signed the PATH Act of 2015 which stands for “Protecting Americans from Tax Hikes Act of 2015”. In this Act are numerous tax relief provisions affecting many different areas of US taxation. These provisions are mainly “extenders” of temporary incentives which have typically been extended one year at a time over the last few years by previous Acts. This situation has created uncertainty since taxpayers have not known until the very end of the year in question whether or not certain incentives would be available retroactively for that year, making planning, investments and coordination a very difficult task.

The PATH Act of 2015 attempts to alleviate this uncertainty by making many of these incentives permanent, or at least extending them for a number of years. Here are a select few of these changes:

  • State sales and income tax deductions: Individuals can now elect to deduct state sales tax or state income taxes as an itemized deduction on their federal tax return. This incentive is made permanent and would mainly benefit taxpayers in states that do not have a state income tax on individuals or those whose sales taxes are higher than their state income taxes.
  • Research credits: The research credit incentive has also been made permanent but some changes have been incorporated. Although the research credit rate remains at 20%, with the possibility of electing an alternative simplified research credit at 14%, there is the possibility for small and start-up businesses to use this credit against their alternative minimum tax (AMT) or against their payroll tax for tax years beginning after Dec. 31, 2015.
  • Bonus depreciation: The 50% bonus depreciation that expired at the end of 2014 is now available for all eligible assets that were, or will be, placed in service in the 2015 to 2017 calendar years. It is not an “additional” depreciation deduction but rather an “accelerated” depreciation deduction. The bonus depreciation rate goes down to 40% for 2018 and then to 30% for 2019. Short of being a permanent incentive, there is at least a 5 year window of certainty that taxpayers can now rely on.
  • 179 expensing: The annual limits for expensing certain property that was placed in service in the 2015 tax year and later are now permanently set at higher limits. The Sec. 179 basic limit allowed an immediate deduction of $25,000 of property additions with this limit starting to be phased-out if total additions reached $200,000 in the tax year. This Act permanently sets the limits to $500,000 of immediate deduction with a phase-out starting at $2,000,000 of total additions.
  • US real estate withholding on sale: For the many Canadians owning US real property either personally or through a Canadian corporation, beware that the buyer or their broker is required to withhold 15% of the gross sales proceeds on transactions with foreign sellers occurring after February 16, 2016. This is an increase of 5% points under this Act. A 10% withholding rate still applies where the buyer will use the property as a residence and where the transaction amount does not exceed $1,000,000. A 0% rate applies if this same transaction does not exceed $300,000. This withholding is a tax instalment and not a final settlement of the US taxes owed by the vendor. The non-US individual or corporation still has the obligation to file a US tax return (1040NR or 1120-F) where this withheld amount is applied against the taxes calculated on any actual gain realized. Filing such a return normally results in a refund to the Canadian individual or corporation of some or all of the tax withheld.

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