On the Right PATH

Adjustments to Depreciation Rules

The Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”) significantly changed two existing depreciation tax breaks — Section 179 expensing and Section 168 bonus depreciation — affecting many companies. You’ll want to consider these changes when planning your company’s investments in depreciable assets.

Section 179 Expensing

Among the act’s many provisions is an expansion of Section 179 expensing. Without the PATH Act, a company’s maximum Section 179 deduction would have been $25,000, and the deduction would be phased out after its depreciable asset investments topped $200,000 for the year. The PATH Act has permanently extended this deduction — increasing the limit to $500,000, with a $2 million limit prior to phase out. Both of these amounts will be indexed for inflation going forward.

For example, in 2016, businesses can deduct up to $500,000 of qualified purchases. But, once a company’s purchases exceed $2.01 million, the amount that can be deducted is reduced by one dollar for every additional dollar spent. Suppose that a company bought $2.31 million worth of qualifying equipment. Using Section 179 expensing, it would be able to deduct $200,000, or the $500,000 expensing limit, less the $300,000 by which its purchases exceeded $2.01 million.

Also, with the new PATH Act, Section 179 expensing — traditionally available for depreciable, tangible personal property such as vehicles, equipment and computers — continues (though special limits apply to the total amount of depreciation that can be claimed for vehicles). In addition, for tax years beginning after 2015, the act eliminates the $250,000 cap for “qualified real property,” including leasehold and retail-improvement property, as well as qualified restaurant property. These now are subject to the same $500,000 cap (as noted above) as other expenditures. The PATH Act also eliminates, for tax years after 2015, the exclusion on air-conditioning and heating units that previously had been in place.

Businesses can use Section 179 expensing to cover the purchases of both new and used equipment, but with one caveat — the company has to record a profit for the year — it can’t use Section 179 to increase or create a loss. While it’s still possible to elect Section 179 on assets in a loss year, the amount used is limited to profits — any excess amounts not taken are available to be carried forward to future years.

Section 168 Bonus Depreciation

The PATH Act also extended bonus depreciation — known as Section 168 bonus depreciation — for most new, unused property placed in service until the end of 2019. Bonus depreciation offers another way to accelerate an asset’s depreciation.

Property placed in service between 2015 through 2017 may qualify for a 50% first-year bonus depreciation. For most qualifying assets, that amount drops to 40% in 2018 and 30% in 2019. Most property placed in service after calendar year 2019 won’t be eligible for bonus depreciation, unless Congress decides to once again extend this provision.

Bonus depreciation applies to many types of assets with depreciable lives of no more than 20 years — including, but not limited to, machinery, equipment and computer software. Until the PATH Act, bonus depreciation often was reserved for “qualified leasehold-improvement property.” Now, it’s available for “qualified improvement property.” This means that improvements don’t have to be subject to a lease in order to qualify. They typically can include improvements to the interior portions of nonresidential buildings, as long as they don’t enlarge the building and aren’t attributable to the internal structural framework, the elevator or the escalator. The improvements need to occur after the building is first placed into service.

Overall Impact

Businesses which are able to take advantage of Section 179 expensing or Section 168 bonus depreciation typically will depreciate the remaining value of assets using their regular depreciation methods. These methods enable companies to reduce their taxable income and lower their tax bills. So you’ll want to plan asset purchases and investments to maximize your ability to leverage these provisions, where possible.

One approach would be to delay some purchases in order to keep overall investments in a given year, at or below, the $2 million (as adjusted for inflation) limit, after which Section 179 expensing is reduced (see above). However, in order to take the maximum advantage of the bonus depreciation provision, you might try in some instances to accelerate some purchases. Doing so will enable you to apply a higher bonus depreciation percentage than you’ll be able to in subsequent years, when the depreciation limit declines.

Best of Both Worlds

You may be able to combine strategies regarding the two provisions to decrease your tax bill. For example, a company invests $1 million in equipment that qualifies under both categories of depreciation. Because bonus depreciation is calculated after Section 179 expensing, the business could expense the first $500,000 under Section 179 and then apply Section 168 bonus depreciation to the remaining $500,000. Any remaining basis would be subject to regular Modified Accelerated Cost Recovery System (“MACRS”) depreciation.

Although one or both of these tax provisions may benefit your business, the rules can be complicated. Your accounting professional can provide additional expertise.

Sidebar: Taking Credit for Good Deeds with the Work Opportunity Credit

The Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”) also extended and expanded the Work Opportunity credit. This tax break offers employers credits — not just deductions — when they hire workers who fall into certain categories.

To the existing categories of unemployed veterans, food stamp recipients, persons referred by vocational rehabilitation programs and others, the PATH Act added a new employee classification, “long-term recipients of unemployment benefits.”

Generally, this is defined as individuals who have been unemployed for at least 27 consecutive weeks, including a period in which they were receiving unemployment compensation under state or federal law. To qualify, they have to be hired on or after January 1, 2016.

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