Democrats 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.
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.
