The Protecting Americans from Tax Hikes (PATH) Act of 2015 extended many taxpayer-friendly provisions. Below is a summary of the legislation’s popular provisions that affect the construction and real estate (CRE) industry.
Enhanced Section 179 Expensing Restored & Made Permanent
Generally, Internal Revenue Code Section 179 allows certain taxpayers to deduct up to a specified amount of the cost of new or used tangible, personal property placed in service during the tax year in a taxpayer’s trade or business. Absent the PATH Act, the §179 maximum, annual expensing limit for the 2015 tax year would have dropped to $25,000 with a dollar-for-dollar, investment-based phaseout kicking in once the amount of §179 property placed in service during the tax year exceeded $200,000. This would have been a significant reduction from the 2014 expensing and investment-based limits of $500,000 and $2 million, respectively. The ability to accelerate deductions can be a driving factor for businesses and their owners when evaluating capital purchases, and the uncertainty of §179 expensing limits made capital expenditures planning difficult in 2015.
The PATH Act provided stability to §179 expensing by retroactively extending and making permanent the $500,000 maximum annual expensing limit and $2 million investment-based limit, with both limits indexed for inflation for tax years beginning after December 31, 2015.
Fifteen-Year Depreciable Life for Certain Building Improvements Restored & Made Permanent
Nonresidential, real property assets, e.g., buildings and their structural components, are generally depreciated using a straight-line method over a 39-year recovery period.
The PATH Act retroactively restored and made permanent a reduced 15-year recovery period for qualified leasehold improvement and restaurant and retail improvement property placed in service during the tax year.
Subject to exceptions, qualified leasehold improvement property generally includes any improvement to an interior portion of a building that’s nonresidential real property if the improvement is made within or pursuant to a lease, the building’s interior portion is exclusively occupied by the lessee and the improvement was placed in service more than three years after the date the building was first placed in service. Qualified retail improvement property is generally any improvement to a building’s interior portion that’s nonresidential real property. The portion must be open to the general public and used in the retail trade or business of selling tangible personal property to the general public. In addition, the improvement must have been put in service more than three years after the date the building was first placed in service.
Recent IRS guidance regarding remodel or refresh expenses for restaurant and retail properties also may provide opportunities to accelerate deductions.
Bonus Depreciation & AMT Relief Restored & Extended for Property in Service Before January 1, 2020
Bonus depreciation has been around since 2001 and is a popular provision allowing accelerated first-year depreciation deductions on certain qualifying new (not used) assets placed in service during a tax year. Absent the PATH Act, bonus depreciation would have expired January 1, 2015. The legislation retroactively restored and extended bonus depreciation for qualified property placed in service before January 1, 2020, with a built-in phasedown in the five-year extension window. Qualified property placed in service between January 1, 2015, and December 31, 2017, will be subject to a 50 percent bonus depreciation. The bonus depreciation rate is reduced to 40 percent for 2018 and 30 percent for 2019. For tax years 2020 and after, depreciation will expire altogether, absent any future legislative changes.
Alternative minimum tax (AMT) relief also was extended for qualified property through the 2019 tax year, mirroring the extension granted for bonus depreciation.
Disregard Under the Percentage-of-Completion Method of the Depreciation Rules for Certain Qualified Property Restored & Extended Through January 1, 2020
Under the percentage-of-completion method (PCM), revenue related to long-term contracts is included in gross income based on a completion percentage determined by comparing costs incurred and allocated to a contract to the total estimated contract costs. Depreciation deducted on equipment and facilities used to perform a contract is generally considered a cost incurred under a contract when determining the completion percentage under the PCM. The acceleration of depreciation deductions has the negative side effect of increasing costs incurred under a contract and accelerating revenue recognition under the contract.
The PATH Act provided a retroactive extension through January 1, 2020, to a provision that excludes bonus depreciation from the numerator of the completion percentage fraction under the PCM for certain qualified property with a recovery period of seven years or less. The five-year extension mirrors the extension of bonus deprecation for qualified property under the PATH Act.
Research Credit Retroactively Restored & Permanently Extended
The research and experimentation (R&E) tax credit, although not always associated with CRE, may result in reduced tax obligations and refund opportunities for taxpayers investing in the development or improvement of certain products, processes, software or technology. As the CRE industry continues to innovate and pioneer new building methods and designs, more businesses are spending time, money or other resources on activities that may qualify for the credit.
Since its 1981 inception, the R&E tax credit has expired and been reinstated numerous times, with each extension usually only lasting a year. Many times, the extension came late in the tax year, with the credit retroactively reinstated to the beginning of the tax year. As discussed above with §179 expensing, this uncertainty has made planning around the R&E tax credit challenging for businesses and their advisors.
The PATH Act retroactively restored the R&E tax credit for the 2015 tax year and permanently extended and expanded the application of the credit going forward. For tax years beginning January 1, 2016, modifications to the credit include the ability for eligible small taxpayers to apply the credit against AMT and for small startup businesses with limited taxable income to apply the credit against up to $250,000 of their payroll tax liability.
Contact your BKD advisor for more information on the PATH Act and how it relates to your business.