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.

IRS Form 4562 Depreciation – Part 6

Part VI – Amortization

The purpose of IRS Form 4562 is to claim your deduction for depreciation, declare any section 179 expense and provide information on listed property. There are six parts to this form and we will dive into the detail of each part. Part VI – Amortization consists of 3 lines as shown in this image:

IRS Form 4562 Depreciation – Part 6

This part is for any amortization you claim. Amortization allows you to deduct part of certain capital costs over a fixed period. Amortization costs that begin in the current year are entered on line 42 (along with a description of the costs and other information); amortization of costs in earlier years are entered on line 43.

For complete instructions review the IRS instructions to Form 4562 or consult a tax professional.

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 Form 4562 Depreciation – Part 5

Part V – Listed Property

The purpose of IRS Form 4562 is to claim your deduction for depreciation, declare any section 179 expense and provide information on listed property. There six parts to this form and we will dive into the detail of each part. Part V – Listed Property consists of 18 lines as shown in this image:

IRS Form 4562 Depreciation – Part 5

This section is for claiming write-offs for listed property: cars weighing 6,000 pounds or less, pickup trucks, computers and peripheral equipment, video recording equipment and other property specifically called “listed property.”

Section A is for the depreciation allowance for listed property, including the Section 179 deduction and bonus depreciation. Section B is used to provide information about vehicles used by sole proprietors, partners or other “more than 5% owners” or people related to these business owners. Section C is used by an employer to report certain information on employee use of company vehicles.

For complete instructions review the IRS instructions to Form 4562 or consult a tax professional.

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.

Read the Full Article Here:

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.