Enhanced Depreciation Provisions Extended

• Date: 01 May 2016
• Published date: 01 May 2016
• Author: Shirley Dennis‐Escoffier
• DOI: http://doi.org/10.1002/jcaf.22167

85

© 2016 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22167

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Enhanced Depreciation Provisions

Extended

Shirley Dennis-Escoffier

In December 2015, Congress

passed the Protecting Americans

from Tax Hikes Act of 2015

(PATH Act). The PATH Act

made permanent the $500,000

limit for expensing and extended

bonus depreciation for a few

more years. The treatment of

leasehold improvements along

with restaurant and retail

improvement property was also

extended as well as the election

to claim alternative minimum tax

(AMT) credits in lieu of bonus

depreciation. These changes, in

combination with the recently

announced increase in the de

minimis safe harbor for small

businesses in the repair regula-

tions, are welcomed news and

should provide some certainty for

businesses in their tax planning.

INCREASED EXPENSING MADE

PERMANENT

Under Internal Revenue

Code (IRC) Section 179, busi-

nesses can immediately expense,

rather than depreciate, up to

$500,000 of qualified property

acquired and placed in service

annually. In recent years, the

$500,000 limit has been extended

for only a year or two at a time,

frequently not until December,

leaving businesses uncertain for

most of the year whether the

higher limit would be extended

or allowed to revert to the old

$25,000 limit. Fortunately,

the uncertainty is finally over

because the $500,000 limit is now

permanent and will be indexed

for inflation in the future.

The PATH Act also made

permanent the eligibility of off-

the-shelf software for expensing.

Other qualified property includes

depreciable tangible personalty

(such as equipment but not

buildings) used in the active

conduct of a business. Both new

and used assets are eligible. The

excess purchase price beyond the

expensing limit can be deducted

through regular depreciation.

Example 1: Alpha

Corporation purchases

$548,000 of equipment

that would normally

be depreciated using a

5-year life for tax pur-

poses. Alpha can elect

to expense $500,000.

Regular deprecia-

tion will be $9,600

[($548,000 – $500,000

expensed) × 20% regu-

lar depreciation rate]

resulting in total depre-

ciation of $509,600 in

the first year.

Congress intended the

expensing provision to be a ben-

efit for only small businesses, so

it included a phase-out for busi-

nesses that acquire a significant

amount of assets in any one year.

Before the PATH Act was passed,

the benefit of expensing would

have started phasing out once

more than $200,000 of assets

were placed in service. Fortu-

nately, the new law reinstates the

$2 million phase-out threshold

for 2015 and indexes it for infla-

tion in future years. The $500,000

expensing provision phases out

on a dollar-for-dollar basis, so

once more than $2,500,000 in

eligible assets have been placed in

service, no expensing is allowed.

Example 2: Beta Cor-

poration purchased

$2,400,000 of equip-

ment in 2015, so

its IRC Section 179

expensing allowance

is reduce d to $100,000

[$500,000 – ($2,400,000 –

$2,000,000)]. If Beta h ad