Matter & Substance
  September 20, 2016

Section 179 and Depreciation Incentives Remain as Key Tax Saving Strategies

As tax planning season rolls around once more, many of our clients are taking advantage of provisions in the tax law relating to equipment purchases in order to enhance their operations while reducing their annual tax liability. In recent years, there has been a lack of clarity regarding these rules as the provisions expired on an annual or bi-annual basis and had to be renewed by Congress. In some instances, the law was not renewed until the very end of the year, making it difficult to make informed decisions about the need to make these investments.

This uncertainty has been removed as a result of the Protecting Americans from Tax Hikes Act, which was passed by Congress in late 2015.

Expensing your buys

​Sec. 179 of the Internal Revenue Code allows businesses to elect to immediately deduct - or "expense" - the cost of certain tangible property acquired and placed in service during the tax year. This is instead of claiming the costs over time through depreciation deductions. The election can only offset net income, however. It can't reduce it below $0 to create a net operating loss; instead the deduction itself is carried forward and the tests for deductibility are reapplied the following year.

The election is also subject to annual dollar limits. For 2016, businesses can expense up to $500,000 in qualified new or used assets, subject to a dollar-for-dollar phase out once the cost of all qualifying property placed in service during the tax year exceeds $2 million.

Improving real property, too

The expensing limit and phase out amounts would have been far lower had Congress not passed the Protecting Americans from Tax Hikes Act in late 2015. The new law made the limits permanent, indexing them for inflation beginning this year. It also makes permanent the ability to apply Sec. 179 to qualified real property, such as eligible leasehold improvement, restaurant, and retail improvement property.

Finally, the new law permanently includes off-the-shelf computer software on the list of qualified property. And, beginning in 2016, it adds air conditioning and heating units to the list.

Considering all options

Both new and used property qualify for Sec. 179; however, a related tax break known as bonus depreciation applies only to new property. Bonus depreciation is generally applied first, but you may elect out of this treatment in cases in which it is advantageous to do so. Be sure to consider all options when purchasing assets.
Most importantly, you should analyze whether a prospective purchase makes sense from a business perspective, considering the benefits from process improvements and other payback factors. The changes in tax law creates a better platform for making these decisions throughout the year, rather than making companies want to wait until the very end of the year.