Off the Beaten Path
Last December, President Obama signed the “Protecting Americans from Tax Hikes Act of 2015,” better known as the “PATH Act.” This was a significant piece of tax legislation that not only extended numerous expiring tax provisions, but also addressed other miscellaneous tax matters. Since not everyone is talking about all of the nuances within this act, we plan to take you off the beaten “PATH.” Between now and the end of the year, we will dig a little deeper into several of the more important provisions of the PATH Act so that you can consider them in your year-end planning.
Let’s start with fixed assets.
As part of your year-end planning, the timing of fixed asset purchases, sales and placed-in service dates presents a great opportunity to plan the best use of related gains, losses and tax expenses. To these ends, one of the most impactful changes in the PATH act was the retroactive permanent extension of Code Sec. 179 and a five-year extension of 50% bonus depreciation.
Code Sec. 179 allows taxpayers to elect to deduct as an expense, up to a specified dollar amount, the cost of tangible personal property or certain real property placed in service during the tax year in the taxpayer’s trade or business. Under the PATH Act, the current $500,000 expensing limitation and $2 million investment phase-out amounts are made permanent, and beginning after December 31, 2015, these amounts will be indexed for inflation. So to recap in layman’s terms, as long as your fixed asset purchases during the year are less than $2 million, you can expense up to $500,000 of the cost of those assets. However, this benefit completely phases out if you purchase more than $2.5 million of assets. As always, there are some caveats. The main ones being that the amount that can be expensed is limited to your taxable income (i.e., Section 179 cannot put you in a taxable loss) and not many states follow these rules.
If you’re unable to take advantage of section 179 (because, for example, you purchased more than $2.5 million of assets or are in a taxable loss), there is another provision that can also provide a significant benefit. Under Code Sec. 168(k), as long as you purchase original use assets (you didn’t buy them used from someone else), in the first-year the asset is placed in service, you can deduct a bonus depreciation in the amount of 50% of the adjusted basis of qualified property. In addition to that, you can continue to depreciate the remaining basis of the asset under MACRS – the accelerated tax depreciation rules – after claiming the initial 50% bonus depreciation deduction. This is almost as generous as Section 179 expensing and unlike section 179, bonus depreciation can be claimed even if you’re already in a taxable loss or it can create a taxable loss.
Where the PATH Act comes into play is that it extended these rules through 2019 (albeit with a gradually decreasing rate). Taxpayers will be able to deduct a 50% first-year bonus depreciation deduction for qualified property placed in service in 2015-2017. This rate will be reduced to 40% for property placed in service in 2018 and will be reduced further to 30% for property placed in service in 2019. It should also be noted that like Section 179 expensing, not all states conform to these rules.
In any case, these are just two of the many important tax provisions under the PATH Act. As you might expect, with any tax planning strategy, the devil is in the details.
A plain reading of these provisions can make them appear simple. However, special considerations arise for self-employed individuals, multi-state filers, owners of multiple businesses or those having interests in S corporations and partnerships. Additionally, the impact of financing the purchase must be taken in account. We work with our clients on a regular basis to work through these issues and maximize the tax benefits of these provisions.
For more information on the PATH Act, or questions about any of these provisions, please contact Rob Schwarzmann, Tax Partner at email@example.com or (404) 420-5795.