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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Questions? Comments? Let us know in the comments section below.

More information about Bassets eDepreciation software can be found at Bassets.net or depre123.com. At Bassets register for our live webinar, download a free evaluation copy and get a personalized pricing estimate. At depre123 try out our Free Depreciation Calculator and check out our cloud based fixed assets application.

IRS Releases PATH Act Procedures to Recoup 2014 Deductions

The PATH act was enacted late in 2015 and was made retroactive to 2014 providing taxpayers with Section 179 and Bonus Depreciation deductions. However, since many had already filed their 2014 taxes, they may not know how to take advantage of these tax breaks retroactively. The IRS has released Rev. Proc. 2016-48 to guide taxpayers on just what to do and Sally P. Schreiber, J.D. in a post on Journal of Accountancy provides the details.  

IRS Releases PATH Act ProceduresThe revenue procedure provides the procedures taxpayers must follow.

For Sec. 179, the revenue procedure explains how taxpayers should treat a disallowed deduction for qualified real property. A taxpayer that treated the amount of a 2010, 2011, 2012, 2013, or 2014 disallowed Sec. 179 deduction for qualified real property as property placed in service on the first day of the taxpayer’s last tax year beginning in 2014 may either continue its treatment of that property or, if the Sec. 6501(a) period is open, amend its federal tax return for the last tax year beginning in 2014 to carry over the 2010, 2011, 2012, 2013, or 2014 disallowed Sec. 179 deduction to any tax year beginning in 2015. However, if the taxpayer’s last tax year beginning in 2014 is open under Sec. 6501(a) and an affected succeeding tax year is closed, the taxpayer must continue to treat the amount of a 2010, 2011, 2012, 2013, or 2014 disallowed Sec. 179 deduction as property placed in service on the first day of the taxpayer’s last tax year beginning in 2014.

For bonus depreciation, the revenue procedure applies to a taxpayer that did not claim the 50% additional first-year depreciation for some or all qualified property placed in service after Dec. 31, 2014, on its fiscal-year tax return beginning in 2014 and ending in 2015 or on its return for a short tax year of less than 12 months beginning and ending in 2015. The procedure explains what these taxpayers should do, depending on what choices they make with regard to bonus depreciation.

Finally, the revenue procedure permits taxpayers to elect to treat round 5 extension property (property eligible for bonus depreciation under the PATH Act) as eligible for the AMT credit in lieu of bonus depreciation. The procedure explains how to do this and warns taxpayers that they must make the election in the first tax year ending after Dec. 31, 2014, even if they do not place any round 5 property in service in that year, if they wish to apply the election to property placed in service in a subsequent year.

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Questions? Comments? Let us know in the comments section below.

More information about Bassets eDepreciation software can be found at Bassets.net or depre123.com. At Bassets register for our live webinar, download a free evaluation copy and get a personalized pricing estimate. At depre123 try out our Free Depreciation Calculator and check out our cloud based fixed assets application.

PATH Act Update – Details You Should Know

We continue to follow up on the PATH act and how it affects businesses and individuals, particularly in the areas of tangible property, Section 179 expensing and bonus depreciation. We turn to David McGuire and his recent post on Accounting Today for the specifics.

How To Take Advantage wWhether a 3115 was filed or not, the new tangible property regulations became law in 2015 and need to be adopted. The ability to write off partial dispositions, claim more expenditures as repairs, and take advantage of other aspects of these rules provide ample opportunities for tax planning. Expenditures need to be closely reviewed and discussed to determine the correct and most advantageous capitalization procedures.

Late in 2015 some certainty and guidance regarding 179 expensing limitations, bonus depreciation and the 179D tax deduction was issued. Congress finally got to the point where they were willing to permanently extend increased 179 expensing, setting the new limit at $500,000 with adjustments for inflation. Additionally, bonus depreciation was extended with phasedowns beginning in 2018. These changes, along with the extension of 179D through the end of 2016, allow taxpayers and professionals to plan in ways that were unavailable in recent years.

While bonus depreciation was extended, it also became more complicated under the PATH Act. In addition to the existing categories for bonus depreciation, the PATH Act added a new category called Qualified Improvement Property, or QIP for short. To qualify as QIP, the assets must meet the following criteria:

  • Placed in service after Dec. 31, 2015
  • 39-year recovery period
  • Improvement to the interior portion of the building, excluding:
    • Enlargement of building
    • Elevators/escalators
    • Internal structural framework
  • Improvement must be placed in service after the original placed in service date of the building.

This now means owner-occupied properties may receive bonus depreciation for certain renovations.

Combining these new rules is where the tax planning comes into play. The new regulations can supercharge the benefits associated with the renovation.

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Questions? Comments? Let us know in the comments section below.

More information about Bassets eDepreciation software can be found at Bassets.net or depre123.com. At Bassets register for our live webinar, download a free evaluation copy and get a personalized pricing estimate. At depre123 try out our Free Depreciation Calculator and check out our cloud based fixed assets application.

Revised Auto Depreciation Limits for ’15 and ’16 Issued by IRS

As reported by Senior Editor Paul Bonner on the Journal of Accountancy website, the IRS issued revised depreciation limits for the amount taxpayers can take for the first year they use a passenger automobile for business in 2015 and the figures for 2016.

Revised Auto Depreciation LimitsThe revisions apply to passenger vehicles that were placed in service during 2015 and to which 50% bonus depreciation applies. They were necessitated by retroactive extension of bonus depreciation for 2015 by the Protecting Americans From Tax Hikes Act of 2015, P.L. 114-113. Accordingly, the first-year depreciation limitation for 2015 is increased by $8,000. For passenger automobiles (other than trucks or vans) placed in service during calendar 2015 to which 50% bonus depreciation applies, the depreciation limit under Sec. 280F(d)(7) is $11,160 for the first year. The corresponding figure for trucks and vans is $11,460.

For passenger automobiles (other than trucks or vans) placed in service in service during calendar 2016 to which bonus depreciation does not apply, the depreciation limit under Sec. 280F(d)(7) is $3,160 for the first tax year; $5,100 for the second year; $3,050 for the third year; and $1,875 for each successive year. For passenger automobiles (other than trucks or vans) placed in service in service during calendar 2016 to which bonus depreciation applies, the first year limit is $11,160; the limits for the other years are the same.

For trucks and vans to which bonus depreciation does not apply, the limit is $3,560 for the first tax year; $5,700 for the second tax year; $3,350 for the third tax year; and $2,075 for each successive tax year. For trucks and vans to which bonus depreciation applies, the first year limit is $11,560; the limits for the other years are the same.

Sec. 280F(c) limits deductions for the cost of leasing automobiles, expressed as an income inclusion amount according to a formula and tables prescribed under Regs. Sec. 1.280F-7. The revenue procedure provides an updated table of the amounts to be included in income by lessees of passenger automobiles and another for trucks and vans, in both cases with lease terms that begin in calendar year 2016.

We recently posted an article on how to calculate depreciation for automobiles. To find out more click here:

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Questions? Comments? Let us know in the comments section below.

More information about Bassets eDepreciation software can be found at Bassets.net or depre123.com. At Bassets register for our live webinar, download a free evaluation copy and get a personalized pricing estimate. At depre123 try out our Free Depreciation Calculator and check out our cloud based fixed assets application.

Capital Investments Dipping Due to US Tax Code

Capital Investments DippingHave you been thinking about spending on capital investments but decided the time wasn’t right, or that you’re not likely to get the tax break that you need? You are not a alone. According to an article by Terry Sheridan on accountingweb.com, a recent study by the Tax Foundation indicates US tax code requirements discourage corporate capital investments, resulting in a reduced cost recovery on initial investment values.

“Virtually all economists agree that investment is one of the main drivers of economic growth, but our tax code actively incentivizes businesses to not invest and instead spend their money on other things,” Scott Greenberg, Tax Foundation analyst and study author, said in a prepared statement. “Combine that with the highest corporate tax rate in the industrialized world, and it’s not hard to see why many argue that reform is needed.”

The study’s other points include:

  • Cost recovery refers to the extent that businesses can deduct the full cost of investments over time.
  • Many economists say that a full cost-recovery system would be the most efficient.
  • Cost recovery varies by industry and by asset, “reflecting the numerous depreciation schedules to which different industries and assets are subject,” the report states.
  • Investments that would be profitable under full cost recovery can’t be made under the current system.

The tax code provides a mix of cost-deduction provisions. Bonus depreciation and Section 179 allow full-cost deductions, the report states. But the 39-year depreciation schedule for commercial structures allows a deduction of less than half of the full cost.

So why not reform the tax code to allow for full expensing of capital investments?

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Questions? Comments? Let us know in the comments section below.

More information about Bassets eDepreciation software can be found at Bassets.net or depre123.com. At Bassets register for our live webinar, download a free evaluation copy and get a personalized pricing estimate. At depre123 try out our Free Depreciation Calculator and check out our cloud based fixed assets application.