For much of this year, uncertainty surrounded whether Congress would extend relief in the area of depreciation-related tax breaks. On December 18, clarity finally arrived with the passage of the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). Here's a look at the impact on two "classic" depreciation breaks.
- Enhanced Section 179 expensing election: In 2014, Sec. 179 permitted companies to immediately deduct, rather than depreciate, up to $500,000 in qualified new or used assets. The deduction was phased out, dollar for dollar, to the extent qualified asset purchases for the year exceeded $2 million. Under the PATH Act, these amounts have been made permanent (indexed for inflation beginning in 2016) rather than allowed to fall to much lower limits.
- 50% bonus depreciation: In 2014, this provision allowed businesses to claim an additional first year depreciation deduction equal to 50% of qualified asset costs. Bonus depreciation generally was available for new (not used) tangible assets with a recovery period of 20 years or less, and certain other assets. That 50% amount has been extended for the 2015, 2016, and 2017 tax years; however, it will drop to 40% for 2018 and 30% for 2019.
Although the extension of these tax benefits was widely anticipated, Congress waited until the very end of the year to enact these changes as they were part of an overall compromise on funding various government programs in 2016. This left little time for taxpayers to take action to capture these benefits for 2015. In order to reap these benefits on your 2015 tax return, you must acquire qualified assets and place them in service by December 31, 2015.
The good news out of the PATH Act is that these benefits, and others, have been extended beyond 2015 into future years, eliminating the uncertainty that plagued taxpayers this year. This will make it easier for taxpayers to develop long-range capital investment plans to properly plan to take maximum advantage of these ongoing benefits.
These are but a few ways the PATH Act affects business tax planning. Please contact us to learn more all the other changes.