Feb 2016 / by Jennifer Iwata, CPA, MST, Gilbert Associates
Congress has once again extended the “extenders,” a varied assortment of more than 50 individual and business tax deductions, tax credits, and other tax-saving laws which have been on the books for years but are temporary because they have a specific end date. This package of tax breaks has repeatedly been temporarily extended for short periods of time (e.g., one or two years), which is why they are referred to as “extenders.” Most of the tax breaks expired at the end of 2014. Now, in the recently enacted Protecting Americans from Tax Hikes Act of 2015 (i.e., the PATH Act), the extenders have been revived and extended once again, but this time Congress has taken a new approach. Instead of just rolling the package of provisions over for a year or two, it actually made some of the provisions permanent and extended the remaining provisions for either two or five years, while making significant modifications to several of the provisions. Since taxpayers now know with reasonably certainty if these deductions will be available in future years, the opportunity for tax planning is available.
De Minimis Threshold. 2014 saw the implementation of new regulations and guidelines regarding what a taxpayer was required to capitalize and what was able to be expensed. As a part of these regulations, taxpayers could make the de minimis safe harbor election to expense property under $500. A higher threshold of $5,000 is available for taxpayers with a CPA audited financial statement. Not a part of the PATH Act but in 2015, the IRS issued revised guidance indicating that the $500 threshold was increased to $2,500 for 2016. Taxpayers should have a written policy in place as of the beginning of the year indicating their capitalization vs expense threshold.
One of the most relevant deductions for small business owners is depreciation. Taxpayers have been able to take additional depreciation or “bonus” depreciation on business property purchases in prior years. But for last couple of years these opportunities have been included in the “extenders,” so taxpayers wouldn’t know the dollar limit imposed until the end of the year not providing much time for planning.
But with the PATH Act, the 179 deduction has been made permanent and bonus depreciation will be phased out over several years.
Section 179 Deduction. The Section 179 deduction allows taxpayers to deduct the cost of qualified property placed in service up to a certain dollar amount in the year place in service instead of a depreciation deduction over several years. Qualified property is generally tangible property other than buildings and building components used in your business. Additionally, the 179 deduction is limited to business income, so if the taxpayer has a loss for the year they are not able to utilize the deduction and would carry it over to the next year. Before the PATH Act, the maximum expensing limit had dropped to $25,000 for tax years beginning after Dec 31, 2014 and if the total property you placed in service during the year exceeded $200,000 that deduction limit was reduced dollar for dollar.
Under the Act, the higher $500,000 expensing limitation that we have seen in prior years is made permanent and you can place up to $2 million of property in service before there is a reduction of the deduction. In addition, both the $500,000 and $2 million limits are now indexed for inflation.
Additionally, Congress addressed certain elements of the 179 deduction. The provision allowing computer software to qualify for the 179 deduction had expired as of December 31, 2014. But the PATH Act retroactively extended and made permanent the qualification of computer software. This is computer software that is readily available for purchase by the general public and is subject to a nonexclusive license and has not been substantially modified. Additionally, air conditioning and heating units are now eligible for the Section 179 deduction.
Bonus Depreciation. In recent years, an additional 50% allowance has been allowed on qualified business property put into service. This allowed taxpayers to deduct 50% of the cost of new equipment in the first year and depreciate the remaining cost over the tax life of the equipment. Qualified property is generally property that is purchased new by the taxpayer and that has a tax life of 20 year or less. Before the PATH Act, this provision had expired and was no longer available for property put into service after December 31, 2014.
The Act extends bonus depreciation for qualified property acquired and placed in service during 2015 through 2019. Eligible taxpayers will be able to claim:
- a 50% bonus depreciation allowance for qualified property placed in service in 2015 through 2017 ;
- a 40% bonus depreciation allowance for qualified property placed in service in 2018; and
- A 30% bonus depreciation allowance for qualified property placed in service in 2019.
In prior years, qualified leasehold improvements were also eligible for bonus depreciation. But in order to be qualified, the property was required to be done subject to a lease and the improvement needed to be place in service more than three years after the date the building was first place in service. After 2015, these requirements are no longer required. Instead the taxpayer must now consider if it is qualified improvement property. Qualified improvement property is any improvement to the interior portion of a nonresidential building and does not include improvements that are done to enlarge the building, to any elevator or escalator, or the internal structural framework of the building.
Congress could once again extend the bonus depreciation deduction after its planned phase-out in 2019 but if you anticipate needing to make interior building improvements you should consider completing the improvement prior to the scheduled phase-out while the deduction is allowed.
Automobile Depreciation. Depreciation on automobiles is limited under the “luxury auto” dollar limits that are adjusted annually for inflation. These ceilings, which are indexed for inflation, operate to extend depreciation beyond the sixth year for cars costing more than what the total depreciation allowance would be over the six years. For passenger autos first put in service in 2015, the ceiling is $3,160 for that year. The annual ceiling amounts for later years are $5,100 for the second year, $3,050 for the third year, and $1,875 for all later years. Slightly higher ceiling amounts apply for certain light trucks and vans (passenger autos built on a truck chassis, including minivans and light SUVs) first placed in service in 2015. In prior years, an $8,000 boost in first-year depreciation was allowed for automobiles purchased before 12/31/2014.
Under the PATH Act, property placed in service after Dec. 31, 2014 and before Jan. 1, 2020, provides that the limitation for passenger autos and for light trucks or vans is increased (subject to a phase down) for qualified property subject to bonus depreciation. For an auto or light truck or van placed in service in 2015 through 2017, the limitation is increased by $8,000. For an auto or light truck or van placed in service in 2018, the limitation is increased by $6,400. For an auto or light truck or van placed in service in 2019, the limitation is increased by $4,800. Thus, for passenger autos placed in service in 2015, the first-year limit of $3,160 is increased to $11,160 ($3,160 plus $8,000) and for light trucks or vans, the limitation of $3,460 is increased to $11,460 ($3,460 plus $8,000).
Note that a separate depreciation allowance for a car only comes into play if you choose to determine the cost of its business use by the “actual expense” method. If, instead, you use the standard mileage rate (57.5¢ for 2015 and 54¢ for 2016), a depreciation allowance is built in as part of the rate.
We hope this information is helpful for preparing your 2015 taxes and planning for 2016 taxes. Please note that this article is not all inclusive of the 2015 and 2016 tax laws. If you would like more details about these changes or any other aspect of the new law, please do not hesitate to give us a call. We’re here so that you can relax.