Monthly Archives: December 2015

Favorable Rules on Deducting Equipment Have Been Extended

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DepreciationDemocrats and Republicans in both the Senate and House of Representatives reached an agreement very early on December 16 to extend various beneficial tax provisions that expired at the end of 2014. The new law is named the Protecting Americans from Tax Hikes (PATH) Act of 2015.

While these tax provisions affect both individuals and businesses, this post will focus on the tax provisions affecting business depreciation. These provisions are very valuable for businesses that purchase long lived assets.

The $500,000 First Year Expensing Election is Now Permanent

The Act retroactively extends and makes permanent the $500,000 expensing limitation and $2 million phase-out amounts. Businesses can immediately deduct up to $500,000 of qualifying assets in the year of purchase. The $500,000 limit is reduced dollar-for-dollar for total qualifying asset purchases over $2 million. Both the $500,000 and $2 million limits are now indexed for inflation. For property placed in service after 2015, Section 179 will also apply to air conditioning and heating units.

Under pre-Act law, the maximum expensing limit dropped to $25,000 and the investment ceiling dropped to $200,000.

The Section 179 benefit is enhanced by the new provision that allows immediate deductions for small asset purchases. Under this provision, taxpayers can immediately deduct amounts paid to acquire or produce a unit of property, or acquire a material or supply if the amount doesn’t exceed $2,500 per invoice (or per item as substantiated by the invoice).

Example: Engineering Co purchases 50 computers at $2,000 each. It also purchased $500,000 of large equipment. Under prior law, Engineering Co could either depreciate the total $100,000 purchase price over five years or it could use $100,000 of its Section 179 limit to immediately deduct the purchase price. If it used Section 179 for the computers, it could use the remaining $400,000 of Section 179 to deduct part of the equipment purchase. The remaining $100,000 equipment purchase would have to be depreciated. With the new provision for small asset purchases, Engineering Co can immediately deduct the $100,000 purchase price since the per unit cost is under $2,500. Engineering Co can take this deduction without having to use any of its Section 179 deduction limit. It can now deduct the full $500,000 large equipment purchase through Section 179.

15 Year Write Off for Qualified Leasehold and Retail Improvement and Restaurant Property Made Permanent

Generally, leasehold improvements are depreciated over 39 years regardless of the term of the lease. In 2014, businesses were able to deduct over 15 years leasehold improvements that met certain qualifications. The new Act now permanently extends the favorable 15 year depreciation period for qualifying leasehold improvements property, qualified restaurant property, and qualified retail improvement property.

Bonus Depreciation Extended Through 2019

Under pre-Act law, businesses were able to immediately deduct 50% of the cost of qualified property. Generally, qualifying property was new (not used) property with a depreciable period of 20 years or less.

The new Act retroactively extends 50% first year bonus depreciation for a few years but gradually reduces it. Bonus depreciation will decrease until it reaches 30% in 2019.

Beginning in 2016, bonus depreciation will also apply to any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date the building was first placed in service (basically, improvements to an existing, not brand new, building)

To see how this applies to you, give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

 

Generate Investment Tax Losses Before Year End

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capital lossesIf you are holding an investment that has depreciated, it may make sense to sell the investment and recognize the capital loss. If you believe the investment’s value will recover, you may repurchase the investment to hold on to your position in the investment. Essentially, you can recognize the loss on the investment while still holding on to your position.

Congress doesn’t like this strategy that generates tax losses by selling a depreciated investment and then quickly repurchasing it, so it developed the wash sale rules. These rules disallow losses if the same or a substantially similar investment is purchased within 30 days of the sale of the investment. Basically, for this strategy to work, you must wait at least 31 days before re-purchasing the investment.

First, Make Sure You Have Capital Gains

This strategy will be effective if you have recognized capital gains during the year. You can sell depreciated investments to generate capital losses to offset the capital gains. If you do not have capital gains, then this strategy may not be very effective because capital losses can only offset up to $3,000 of your ordinary income. The remaining capital losses will be carried forward indefinitely.

Why Short Term Capital Losses Are Better

On the capital gain side, long term capital gains are advantageous because they are generally taxed at the lower 15% tax rate (23.8% for higher income taxpayers). Short term capital gains are taxed at ordinary income tax rates (up to 43.4%–the sum of the 39.6% maximum ordinary income tax rate plus the 3.8% net investment tax).

On the capital loss side, short term capital losses are advantageous because of the capital gain netting rules. When netting capital gains and losses, long term gains and losses are netted against each other while short term gains and losses are netted against each other. Short term capital losses are advantageous because they first offset short term capital gains that are subject to the higher ordinary income rates.

Example: Fred has a $30,000 long term capital gain and a $20,000 short term capital gain. He is holding on to an investment that he has held for 11 months. It would generate a loss of $15,000 if sold. Fred’s $30,000 long term capital gain will be taxed at 15% and his short term capital gain will be taxed at 28%.

If Fred sells the investment now, the loss will be short term capital loss and will reduce the capital gain that is taxed at 28%. The $15,000 loss will yield a $4,200 benefit. If Fred waits a couple months and then sells the investment, it will generate long term capital loss since the investment is now held for more than 12 months. The $15,000 loss will now offset his long term capital gain that is taxed at 15%. The loss now yields a $2,250 tax benefit. John will have $1,950 ($4,200 less $2,250) more money in his pocket if his loss is short term rather than long term.

If short term capital losses exceed short term capital gains, they will then offset long term capital gains (assuming long term capital gains are greater than long term capital losses).

Example 2: Same facts as above except that Fred has no short term capital gains. In this situation, his $15,000 short term capital loss will offset his long term capital gain that is taxed at 15%, yielding a $2,250 tax benefit. Since there are no short term capital gains to offset, the primary advantage of a short term capital loss does not come into play.

To see how this applies to you, give us a call at 248-538-5331.

freeconsultation

Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

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