Enhanced Depreciation and Expensing Offers Tax-Saving OpportunitiesMay 25, 2016
Crystal A. Germanese, CPA
Passage of the “Tax Extenders” undeniably provided one of the major headlines – and tax benefits – to come out of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), signed into law on December 18, 2015.
There are over 50 tax extenders but few have a wider impact on businesses than:
- retroactive and permanent extension of Code Sec. 179 expensing rules,
- the 5-year extension and phase out of bonus depreciation,
- the new Qualified Improvement Property.
Section 179 expensing.The PATH Act permanently extended the Code Section 179 dollar of investment limitations at the higher $500,000 and $2 million levels, which are adjusted for inflation for tax years beginning after 2015 (it is $500,000 and $2,010,000 for 2016). In addition, starting in 2016, the $250,000 limitation on the amount of section 179 property that can be attributable to qualified real property has been eliminated. Further, for tax years beginning after 2015, the Code Section 179 expense deduction is now allowed for air conditioning and heating units.
Bonus depreciation.The PATH Act extended Code Section 168(k) bonus depreciation to apply to most qualifying property placed in service before January 1, 2020 but in the following decreasing percentages through December 31, 2019:
- 50% bonus depreciation allowance for qualified property placed in service in 2015 through 2017;
- 40% bonus depreciation allowance for qualified property placed in service in 2018; and
- 30% bonus depreciation allowance for qualified property placed in service in 2019.
Qualified Improvement Property. The Act also adds a new type of property that is eligible for bonus depreciation referred to as Qualified Improvement Property. This new type of property is broader than Qualified Leasehold Improvement Property and can include improvements without regard to whether the improvements are property subject to a lease and also improvements placed in service less than three years after the building was first placed in service.
Note that if property does not meet the definition of Qualified Leasehold Improvement Property for the 15-year MACRs period (below), it may still meet the definition of Qualified Improvement Property. For example, a taxpayer can have 39-year MACRS period Qualified Improvement Property that is eligible for bonus depreciation.
15-year MACRS period for Improvements. The PATH Act permanently extended the 15-year MACRS depreciation period for qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. Note that while qualified leasehold improvement property and qualified retail improvement property also by definition satisfy the requirements for qualified improvement property (above), property eligible for depreciation as qualified restaurant property may or may not meet these requirements.
If you have any questions about these new “extenders,” please contact our office.
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