Depreciation Considerations in a Time of Expired Provisions
Author: Stephanie Carper
On December 19, 2014, President Obama signed the Tax Increase Prevention Act of 2014. Among other tax provisions, this bill retroactively extended 50 percent bonus depreciation for qualifying new asset purchases and temporarily increased the Section 179 asset expensing election to $500,000 through December 31, 2014.
However, less than two weeks later, those accelerated depreciation provisions, which taxpayers have come to rely on for income tax planning purposes, had expired again. As of the publication of this article, the Section 179 limitation has reverted to the original $25,000 threshold, and bonus depreciation is not available for 2015 fixed-asset purchases.
Many expect some relief in a comprehensive tax extenders package before the end of the year. On July 21, the Senate Finance Committee approved legislation that, if ultimately passed by Congress and signed by the president, would extend the accelerated provisions through December 2016.
While this particular extenders package would reinstate 50 percent bonus depreciation and a $500,000 Section 179 expensing limit, taxpayers are left to operate in an environment of no bonus depreciation and a $25,000 Section 179 limit, making income-tax planning difficult. Here are a few items to keep in mind when planning around these lower limits:
- These provisions, while beneficial, are a deduction from taxable income, not a tax credit. Business needs often don’t allow a taxpayer to wait until Congress has made extender decisions.
- Based on past congressional actions, extender packages would retroactively apply. If passed, any qualified purchases made to date still would qualify for the increased limits.
- Bonus depreciation only applies for new equipment. If you’re contemplating purchasing new equipment and want certainty of your income tax treatment, consider postponing your purchase until a final extender package is passed.
- Section 179 applies to new or used equipment purchases. If you’re purchasing used equipment that would be under the current $25,000 Section 179 limit, there’s less reason to wait.
- Section 179 has a threshold for total equipment purchases. If you currently place more than $200,000 of qualifying equipment into service during the tax year, your $25,000 limit is reduced dollar for dollar for any purchases above $200,000. If prior-year amounts are extended, that threshold increases to $2 million before the $500,000 limit is affected in the same manner.
If you have questions or would like to further discuss any additional fixed-asset planning ideas, contact your BKD advisor.