Phase Out of Bonus Depreciation Requires Planning From Businesses

Under PATH, bonus depreciation was extended through 2019. Businesses are allowed to deduct 50% of their equipment cost up front in 2015, 2016, and 2017. It will drop to 40% in 2018 and 30% in 2019. Then it’s gone. However, Congress may grant another extension and, given its history, that’s pretty likely. But businesses should still properly prepare for this phase out. Those that don’t plan wisely could be setting themselves up for unexpected tax liabilities as the benefit expires. In an article in CFO author Nancy Geary outlines the questions CFOs should be asking

phase-out-of-bonus-depreciation-requires-planningWhat will this mean for taxable income? It depends on your specific business and how you have been treating equipment depreciation for tax purposes. 

What constitutes a qualified asset? For property placed in service before this year, qualified assets included items such as certain types of computer software, water utility property, and some leasehold-improvement property, as well as new tangible property with a recovery period of 20 years or less. 

What is qualified improvement property? Starting this year, qualified improvement property — including improvements that are made to building interiors, for example — can also be taken into account for bonus depreciation, regardless whether it is leased.

Are there any alternatives to bonus depreciation? It’s time to talk about Section 179 of the tax code.

While the current bonus depreciation structure allows for an immediate 50% deduction on new equipment, the Section 179 election is an alternative that allows companies to deduct up to 100% of their overall asset purchases in the year of acquisition, but with some significant limits.

How Can You Prepare for This Change? If your company has utilized bonus depreciation extensively in prior years, we recommend projecting out the next several tax years to see how the phase-out will affect your taxable income so that you can manage cash flow accordingly.

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