GOOD NEWS ON EXPENSING FROM THE IRS AND CONGRESS!
The Internal Revenue Service and Congress have significantly increased the opportunity to currently deduct the costs of property purchased for use in business, rather than having to depreciate those costs over many years. As noted in our last blog regarding the application of the de minimis safe harbor election, these opportunities are more good news to taxpayers, and by understanding these news rules, taxpayers and their advisers are able to take full advantage of them.
There are three provisions allowing taxpayers to accelerate deductions for the costs of capital assets and other property and avoid depreciation, which include the following:
- the de minimis exception to the tangible property, or “repair,” regulations
- expanded Sec.179 expensing
- bonus depreciation
Note that all three provisions can be used in the same year, although not on the same costs.
SEC. 179 EXPENSING
Sec.179 expensing provides an opportunity to deduct up to $500,000 of the cost of certain qualifying tangible property, instead of depreciating it. The $500,000 limit is reduced if the taxpayer places Sec.179 property – in excess of an “investment ceiling” – into service during the year. That ceiling is $2,000,000, as adjusted for inflation ($2,010,000 for 2016), and the $500,000 limit is reduced, dollar for dollar, for every dollar the taxpayer’s Sec. 179 property cost goes over that ceiling.
These increased amounts for the limit and the ceiling were not permanent and had reverted to their much lower statutory amounts before the PATH Act retroactively extended the higher amounts and made them permanent, while also indexing the amounts for inflation. In addition, before the PATH Act, a taxpayer could revoke a Sec. 179 election without IRS consent only for tax years beginning before 2015.
Property eligible for Sec. 179 Expensing and Limitations
To be eligible for Sec.179 expensing, the property must be used primarily in the active conduct of a trade or business. Eligible property includes tangible personal property or off-the-shelf computer software that is Sec. 1245 property (i.e., most depreciable property, other than buildings) and qualified real property. However, there are several items it does not include. Most notably these items are certain property used predominantly to furnish lodging and air conditioning or heating units placed in service in tax years beginning before 2016.
The exclusion of air conditioning and heating units from the definition of eligible Sec. 179 property was removed by the PATH Act, but only prospectively. The Sec. 179 deduction cannot exceed the taxable income from the taxpayer’s active trades or businesses. Amounts that cannot be deducted because of the taxable income limitation can generally be carried forward until they can be deducted.
Making the Sec. 179 Election
The Sec. 179 election is made on Form 4562, Depreciation and Amortization, Part I. The taxpayer must describe the property and costs the election applies to on the form.
Contact your CPA for further information regarding this topic, and watch for the final installment in this series of 3 blogs coming up very soon!