Q: What do the 2016 capital investment incentives (depreciation bonus and increased Sec. 179 expensing) mean for my business?
A: By lowering your taxable income, bonus depreciation and Sec. 179 can cut your 2016 tax bill, thereby freeing up cash in the near term.
Q: Is there any downside to taking advantage of bonus depreciation?
A: The more you depreciate now, the less you'll be able to depreciate later. In other words, your tax bill in future years may be higher because you'll have less to deduct. But ask yourself this: Would you rather have the tax savings in your pocket now to invest in your company or would you rather have Uncle Sam hold onto your money for a couple additional years?
Q: How does the depreciation bonus work?
A: Companies that buy new equipment in 2016 can depreciate 50 percent of the cost in the first year, plus the percentage of the remaining basis in the equipment that would ordinarily be depreciable under MACRS. For a $100,000 piece of equipment with a five-year MACRS life, the 2016 depreciation would be $60,000: $50,000 depreciation bonus, plus 20 percent of the remaining $50,000 basis. However, this is just a general example of how the law works. Every taxpayer is unique, so check with your tax professional about whether and how you would benefit from bonus depreciation.
Q: Does the equipment have to be new to qualify for bonus depreciation in 2016?
A: Yes. To be eligible, the "original use" of the equipment must commence with the taxpayer claiming the depreciation bonus after Dec. 31, 2015.
Q: If I'm leasing a piece of equipment and I decide to buy it, can I claim the depreciation bonus?
A: There is one very limited exception to the "new" requirement. If Company A is leasing a piece of equipment (e.g., from a distributor) and Company A is the first and only user of the equipment (i.e., it hasn't been rented or leased to any other customer) and Company A converts the lease to a purchase within three months of the start of the lease period, then Company A may claim the depreciation bonus on the equipment. Check with your tax professional for more details.
Q: How long do I have to take advantage of the deprecation bonus in 2016?
A: To qualify, the new equipment must be acquired and placed in service by the taxpayer claiming the depreciation bonus before Jan. 1, 2017.
Q: Do I have to use the deprecation bonus?
A: No. You may elect out of depreciation bonus (meaning it's your choice whether to use it). Additionally, in lieu of claiming bonus depreciation, companies may instead elect to accelerate alternative minimum tax (AMT) credits.
Q: What's the difference between the depreciation bonus and Sec. 179?
A: The depreciation bonus is a temporary economic stimulus tool. Since 2002, Congress has used bonus depreciation to incentivize capital investment during economic downturns. Sec. 179 is a permanent part of the tax code commonly called "small business expensing". Sec. 179 expensing begins to phase out as a company's capital investments for the year exceed $2 million, thus larger companies are generally not able to take advantage of it. In order to stimulate small business purchasing, Congress increased the Sec. 179 expensing levels during periods of economic volatility. The PATH Act permanently raised and indexed the Sec. 179 levels and phases bonus depreciation out through 2019.
Q: How will the depreciation bonus be phased out?
A: For 2015, 2016, and 2017, the depreciation bonus amount is 50 percent, for 2018 it is 40 percent, and for 2019 it is 30 percent. The bonus depreciation law expires in 2020.
Q: What are the Sec. 179 expensing limits for 2016?
A: The PATH Act permanently raised the Sec. 179 expensing level to $500,000 and increased it for inflation. For each dollar over $2 million, the eligible expensing amount correspondingly drops by one dollar. Thus, companies that spend more than $2,500,000 on tangible personal property cannot take advantage of Sec. 179 (but they can still use the depreciation bonus, assuming the equipment meets all the qualifications). The $500,000 expensing level and $2 million phase out cap will be adjusted for inflation in 2016. The IRS has not yet announced the adjusted numbers.
Q: Does the equipment have to be new to qualify for Sec. 179?
A: No. Unlike the depreciation bonus, Sec. 179 expensing can be applied to both new and used equipment.
Q: Can Sec. 179 and the depreciation bonus be combined?
A: Yes. Companies eligible for Sec. 179 can also combine it with the depreciation bonus for even bigger tax savings.
Q: Do the PATH Act capital investment incentives apply only to construction equipment?
A: No. A broad range of tangible personal property is eligible for special tax treatment under the PATH Act.
Q: Where can I get more information about bonus depreciation and Sec. 179?
A: IRS Publication 946 - How to Depreciate Property provides a good overview of how bonus depreciation and Sec. 179 operate. Keep in mind that the guidance document has not yet been updated for 2015 or 2016, so keep the date changes from the PATH Act in mind when you read it.
Q: Where can I get more information about everything that was in the Tax Increase Prevention Act?
A: A section-by-section summary of the PATH Act prepared by the House Ways & Means Committee is available here.
Q: What should I do if I have other questions?
A: Contact your accountant, attorney, or other tax professional in your area if you have further questions.