What You Need to Know About Bonus Depreciation and Section 179
Under H.R. 2510, qualified property has been modified to include qualified improvement property, which is any improvement to an interior portion of a building that is nonresidential real property if the improvement was made after the building was initially placed in service. The bill also increases the maximum allowable depreciation deduction for a passenger automobile by $8,000. Additionally, the bill provides for a permanent extension for the election to increase the alternative minimum credit limitation in lieu of bonus depreciation for taxable years after December 31, 2014.
The Committee on Ways and Means’ approval is the first step in reinstatement. It still must be approved by the Senate Finance Committee, the Senate, a joint session with the House and Senate present, and then ultimately approved by the President. However, year-end purchases of property can still create significant tax savings if properly planned for (i.e. consideration of conventions).
The half-year convention treats business property as having been placed in service in the middle of the year. For year-end planning purposes, even if an asset is placed in service late in the year, businesses can still receive a half of a year’s worth of depreciation. But, businesses should avoid placing more than 40 percent of their depreciable personal property in service during the fourth quarter because this requires application of the mid-quarter convention, significantly reducing their depreciation deduction. Fortunately, properly planned expensing of assets under IRC Section 179, discussed below, can aid in avoidance of the mid-quarter convention altogether.
Section 179 allows for the expensing of qualified property placed in service during the tax year up to a certain threshold. Since the assets are expensed, the basis of these assets is disregarded for purposes of the aforementioned 40 percent test. Therefore, if the eligible assets are expensed, application of the mid-quarter convention is not required. Taxpayers have enjoyed such benefits of IRC Section 179 for the past several years. For tax years beginning after 2009 and before 2015, the maximum amount that could have been expensed was $500,000 and the maximum annual expensing amount was $2 million. However, if Section 179 provisions are not extended, the maximum amount that can be expensed is reduced to $25,000 and the maximum annual expensing amount is reduced to $200,000.
In the past, provisions concerning Section 179 have been amended late in the year. On July 21, 2015, the Senate Finance Committee approved an amended extenders bill which calls for the maximum expense amount and maximum annual expensing amount to remain at $500,000 and $2 million respectively. The extenders bill would provide a two-year extension, retroactive to the beginning of the year, for this provision.
Although the provisions discussed have been extended in prior years, taxpayers should be cognizant of the possibility that they will not be extended in the future. It is imperative that taxpayers develop effective plans to utilize other provisions offered in the IRC to properly reduce their level of tax exposure.
If you have any questions, please contact your WithumSmith+Brown professional, a member of WS+B’s National Tax Services Group or email us at [email protected].
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To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
