Congress stilled the winds that blew Section 179 limits up and down during the past few years by enacting the newly minted Protecting Americans from Tax Hikes Act in December 2015. Deep within the 233 pages of legislation are provisions related to the extension and modification of bonus depreciation and Section 179 expensing. But why are we talking about this seemingly obscure tidbit of tax code?
We understand if government-ese makes you glaze over, so let’s spell out how exactly this PATH Act did small businesses like yours a favor and how you can use the changes to invest in your business by purchasing that new equipment or software your budget couldn’t otherwise cover.
The PATH Act – what does that mean for you? We found a lot of answers, and some of them are very pleasant surprises.
To start, your business can qualify if it purchases, finances and/or leases less than $2 million in new or used business equipment during 2016. The equipment in question must be used for more than 50 percent of the time to qualify for the Section 179.
In a nutshell, Section 179 of the IRS Tax Code allows your business to deduct – for the current tax year – the full purchase price of financed or leased equipment and off-the-shelf software that qualifies for the deduction.
There are rules and caveats, of course, but they’re actually fairly generous.
The equipment purchased, financed or leased – yes, financed and leased acquisitions qualify as well! – must be within the specified dollar limits of the legislation, and the equipment must be put into service between Jan. 1 and Dec. 31 of the tax year that the deduction is being taken. For 2016, that specified dollar limit is $500,000. There’s a spending cap for each year – for 2016, you can’t exceed $2,000,000 in purchases, leases or financed funds – making this a bona fide small-business deduction.
The PATH legislation also reinstated the 50 percent bonus depreciation on new equipment purchases, and it provides adjustment for future inflation. This allows business to write off the depreciation of new purchased equipment at 50 percent during the first year instead of the standard depreciation calculation.
If you’re perplexed by the difference between bonus depreciation and Section 179 deduction, you’re not alone. In fact, there’s an entire website dedicated to this complex legislation and how it applies to our field.
According to Section179.org, the most important difference is both new and used equipment qualify for Section 179 deduction, while bonus depreciation covers new equipment only. Bonus depreciation is useful to very large businesses spending more than whatever Section 179’s spending limit is for that year. Also, businesses with a net loss in a given tax year qualify to carry-forward the bonus depreciation to a future year. When applying these provisions, Section 179 deductions are generally taken first, followed by bonus depreciation, unless the business has no taxable profit in the given tax year.
The Associated Equipment Distributors (AED), a membership organization of construction equipment dealers, also offers a succinct, clear outline and Q&A on the most salient aspects of increased Section 179 expensing and the depreciation bonus. AED made its guide public with the understanding that the information is provided as a public service to equipment purchasers and that it not be construed as tax advice or as a promise of potential tax savings or reduced tax liability.
Here’s AED’s at-a-glance rundown:
– Under the PATH Act, 50 percent bonus depreciation is in effect for 2015, 2016 and 2017. For 2018, the depreciation bonus amount is 40 percent. For 2019, it is 30 percent.
– Helps businesses that buy new equipment cut their tax bill by allowing them to depreciate (“write off”) more of the cost the equipment in the year it is purchased.
– Applies, among other things, to purchases of tangible personal property (including construction, mining, forestry and agricultural equipment) with a Modified Accelerated Cost Recovery System (MACRS) recovery period of 20 years or less.
– Applies to new equipment only (“original use” must occur with the taxpayer claiming bonus depreciation).
– Equipment must be purchased and placed in service in the year in which the taxpayer is claiming the bonus.
– In lieu of claiming bonus depreciation, companies may instead elect to accelerate alternative minimum tax (AMT) credits.
– Discretionary: Taxpayer need not claim the depreciation bonus.
Now that you’re inspired, feel free to call us here at CNC Masters at 626-962-9300 or email us at [email protected]. We’ll help you choose the piece of equipment you’ve been waiting for, because there really is no better time to buy than in 2016!