For the past several years, accelerated depreciation tax rules have had little certainty. Laws were passed with sunset provisions, only to be extended at the 11th hour. However, the recently passed “Protecting Americans from Tax Hikes Act of 2015” (PATH Act) as well as regulations adopted by the Internal Revenue Service, now provide more long term certainty to business owners. Some of the pertinent rules are as follows:
Section 179
- Section 179 expense deduction of up to $500,000 is now permanent. (Phase out for larger businesses with annual equipment purchases of $2,000,000 or more.)
- The deduction limit of $500,000 is now indexed to inflation. As such, it should increase slightly each tax year.
- Purchases of new and used equipment are eligible.
- Real property generally does not apply.
Bonus Depreciation
- Bonus depreciation is extended from 2015 to 2019.
- Bonus depreciation is 50% for assets placed in service during 2015, 2016 and 2017. It is reduced to 40% in 2018 and 30% in 2019. Bonus depreciation is completely phased out for 2020. (However, the law could always be extended again at that time.)
- Generally applies to new equipment placed in service during the tax year. Purchases of used equipment are not eligible.
DeMinimus Safe Harbor
- The IRS issued regulations to provide a safe harbor election that allows businesses to immediately deduct purchases of tangible property that are $2,500 or less. (Or up to $5,000 for businesses with audited financial statements.)
- The $2,500 threshold is per item or invoice. Since many fixed assets (i.e. computers) are less than the threshold, this effectively increases the amount of current year deductions a business can take.
- An annual election is to be made and filed with the business’ federal income tax return.
Retail Improvements
- The provision makes permanent the 15-year recovery period for qualified retail improvement property, qualified restaurant property, and qualified leasehold improvement. (This greatly benefits automobile dealerships that are working with manufacturers to upgrade facilities.)
- Qualified retail improvement property is any improvement to an interior portion of a commercial building. The building needs to be open to the general public and used in a retail trade or business selling tangible personal property to the general public.
- Upgrades that fall within this category allow the business owner to utilize section 179 to maximize current year depreciation deductions on improvements.
- The utilization of Section 179 for qualified retail improvements had been capped at $250,000 for 2015. This cap has been lifted starting in 2016.
Car and Truck Limits
- Listed property rules apply to automobiles. These rules restrict the depreciation deductibility of vehicles. These are outlined as follows:
| Passenger Vehicles – Cars | Passenger Vehicles–Trucks & Vans | Vehicles Over 6,000 lbs. | *Exceptioned Vehicles Over 6,000 lbs. | |
| 2015 Depreciation Deduction Limit (1st year) | $3,160 | $3,460 | Not limited | Not limited |
| Bonus Depreciation Limit | $8,000 | $8,000 | Not limited | Not Limited |
| Section 179 Limit | Not eligible | Not eligible | $25,000 | Not limited |
| Maximum 1st Year Deduction | $11,160 | $11,460 | Certain restrictions | Not limited |
*Certain specific vehicles over 6,000 lbs. have no limits. These include nine passenger vans, vehicles with a cargo area of six feet in length not readily accessible from the passenger compartment (i.e. box truck), and vehicles without seating rear of the driver (i.e. cargo van).
For your convenience, we have also created a table to assist business owners to understand the tax depreciation available to them. To view this table, please click here.
If you have any questions regarding this article, please contact Jamie Downey at JMDowney@DowneyCoCPA.com or at 800.849.6022.
