Protecting Americans from Tax Hikes Act: Big Business Write-Offs Available
There are a number of business-friendly changes that were made to tax law with the passage of the PATH ACT, also known as the Protecting Americans from Tax Hikes Act. This law made the previously established Section 179 deduction’s higher expensing amount permanent. It also extended the bonus depreciation. These changes have benefited many businesses, and in order for you to get the full advantage for your business, it is important that you understand how they work and impact you.
The Section 179 Deduction
The Section 179 Deduction makes it possible for a business entity or a business’ owner to take the cost of either new or used tangible property and fully expense it rather than depreciating it over a period of time.
This applies to both personal property and certain real property as long as it has been placed into service during the tax year in which it was purchased.
There is a limit to the amount that can be deducted, and for the year 2016 the maximum is $500,000. However, this maximum amount will be adjusted for those businesses that place property in excess of $2,010,000 into service during the tax year, with the reduction being made on a dollar-for-dollar basis. These limits are both subject to annual inflationary adjustments.
The rules under Section 179 have established that purchases of both off-the-shelf computer software and qualified real property fall under the PATH Act’s rules. This means that retail improvements, restaurant property, and qualified leasehold improvements count.
The Section 179 elections can be revoked, but once this happens it is irrevocable. Though there was once a $250,000 expense limitation and carryover limitation, both of these have been eliminated. As a last detail, after December 31, 2015, the rules can be applied to expenses for heating units and air conditioning units.
Not all of the rules under Section 179 have been extended permanently. Bonus depreciation has been extended, but only through 2019. This depreciation is being phased out over the next few years, and this is being accomplished by slowly cutting the bonus percentage that is allowed.
Bonus depreciation refers to the depreciation that a business is able to take during the first year that a new piece of property is purchased and put into service.
The rule generally applies to property that is expected to last no more than twenty years, and can also be used towards qualified interior improvements to leased nonresidential properties after the building has been put into service and to certain plants that bear fruit or nuts as long as they are grafted or planted prior to January 1, 2020.
Though the amounts will be phased out in future years, for the years 2012 through 2017 the depreciation can be taken for as much as half of the purchase price, but unless Congress takes further action to extend the bonus depreciation, after 2019 it will no longer be available. The 50% depreciation can be taken through 2017, but in 2018 the number drops to 40 percent maximum, and for 2019 it drops further to just 30 percent.
In addition to the depreciable property listed above, the bonus depreciation can also be applied to small trucks and automobiles in their first year in service. The calculation for automobiles is calculated differently.
Rather than using percentages, there has been a limit of $8,000 that can be added to the first year allowable deduction. This amount will remain in place for years 2015 through 2017, but in 2018 it will drop to $6,400 and for 2019 it will drop further to $4,800.
The PATH Act will have a significant impact on many businesses.
For help in understanding how the rules apply to your business, contact our office at (804) 723-1050 to set up an appointment.