The Protecting Americans from Tax Hikes (PATH) Act of 2015, which was signed into law on December 18, 2015, extends permanently or temporarily many business-related tax rules. In this and upcoming blogs, I’ll address some of the key tax breaks that may impact your 2015 return as a result of the new law, and what it means for planning in 2016 and for years to come. This blog focuses on equipment purchases and improvements to certain types of real property interests.
Section 179 deduction
The dollar limit on the Section 179 deduction, also referred to as expensing, has been permanently set at $500,000. If it hadn’t been for the PATH Act, the dollar limit for 2015 would have been $25,000.
If total purchases of qualified property placed in service by the end of the year exceed $2 million, the $500,000 limit is reduced by every dollar over the $2 million threshold (i.e., no expensing for purchases of $2.5 million or more). Without the PATH Act, the threshold would have been $200,000.
Starting in 2016, the dollar amounts can be indexed for inflation (expect the IRS to announce these adjustments, if any, in the weeks to come). Off-the-shelf software is treated as qualified property. For 2016 and later, air conditioning and heating units are also qualified property.
Expensing isn’t limited to equipment; it also applies to qualified leasehold, restaurant, and retail improvements. For 2015, the expensing for these properties is limited to $250,000. Starting in 2016, this cap is permanently removed, so the same $500,000 (adjusted for inflation) limit applies.
For new (not pre-owned) property, there’s a 50% first-year depreciation allowance. This had expired at the end of 2014, but has been extended for five years (although the rate in 2018 is 40%, and in 2019, 30%).
Impact of vehicle purchases. Depreciation for vehicle purchases usually is subject to an annual dollar limit (there are exceptions). If you bought a new car, light truck, or van in 2015, in addition to the basic dollar limit, you can add $8,000 for bonus depreciation. Because of the percentage reduction in 2018 and 2019, the dollar limits will be $6,400 and $4,800 respectively at that time.
Most of the basic depreciation rules are unchanged. However, the new law made the following tweaks:
- 15-year recovery period for leasehold, restaurant, and retail improvements (instead of the usual 39 years for nonresidential realty).
- 3-year recovery period for race horses (instead of the usual 7-year period).
De minimis rule
The new law did not change the regulations on the de minimis safe harbor for tangible personal property (personal here doesn’t mean for your own use but rather differentiates the property from realty). Instead of treating equipment purchases as assets on your books, you can instead treat them as materials and supplies that you deduct now. The limit per item or invoice for businesses without an applicable financial statement such as an audited financial statement or SEC filing (i.e., almost all small businesses) is:
- $500 in 2015
- $2,500 in 2016 and later
Best way to handle equipment purchases
There’s no one answer; it all depends on your tax situation. The de minimis safe harbor is an annual election, so you can decide at tax time whether to write off the cost of equipment purchases under Sec. 179 or the safe harbor rule (assuming your books comport with this tax treatment). Usually, the de minimis safe harbor is an easy tax treatment. If purchase costs exceed the de minimis safe harbor limit, you can use the Sec. 179 deduction. For expensive items, such as heavy construction equipment, you can combine the Sec. 179 deduction with bonus depreciation and regular depreciation.
However, there are some situations in which optimizing a current deduction doesn’t produce any favorable tax result. For example, if you are an S corporation that has losses and you, the shareholder, have no basis against which to offset the losses, then increasing losses by optimizing current deductions doesn’t make sense. A better option in this situation is to use regular depreciation and claim depreciation allowances in years to come.
If you buy property for your business, you’re going to be able to write off the cost—now or over years to come. Talk with your tax advisor to learn the best way to claim deductions for purchases you made in 2015 and to plan for 2016 as your needs require and your budget allows.