Section 179 Expensing and Bonus Depreciation Can Make Capital Investments More Affordable
posted Oct 10, 2016 by Robert D’Andrea in the Global Tax Blog
For manufacturers, capital expenditures are key to growing their businesses. KLR’s 2016 Manufacturing Industry Survey report found that 79% of respondents expected to invest in manufacturing equipment in 2016. Computer-related expenditures also ranked high, with 50% of respondents expecting to invest in hardware this year and 46% in software.
But such investments can be expensive, and many manufacturers need tax breaks in order to afford them.
Depreciation Deductions 101
Generally, for tax purposes, capital expenditures must be depreciated over a period of years — typically three years for software, five years for hardware and seven years for manufacturing equipment. So, in the year of your investment, you can deduct only a small part of the cost. This can make it challenging for manufacturers (and other businesses) to invest as much as they’d wish, which, in turn, can impede growth.
Fortunately, two valuable depreciation-related tax breaks were extended and enhanced by last December’s Protecting Americans from Tax Hikes (PATH) Act: Section 179 expensing and bonus depreciation. The breaks allow you to take larger deductions in the year you place qualifying assets in service.
What You May Not Know
We’ve provided overviews of these breaks and the PATH Act changes in some blogs earlier this year, but here are some things you may not know about them:
- The PATH Act doesn’t just permanently increase the Sec. 179 expensing limit from $25,000 to $500,000. It also calls for annual indexing of the $500,000 limit. So, depending on inflation rates, the limit may go up for 2017.
- The PATH Act also calls for annual indexing of the phaseout threshold — the amount of qualified asset purchases for the year at which the expense deduction is reduced dollar-for-dollar. (The break is intended to benefit primarily smaller businesses.) This threshold was set at $2,000,000 for 2015. With inflation-indexing, the threshold is $2,010,000 for 2016.
- Although bonus depreciation will remain at 50% for 2016 and 2017, it’s scheduled to drop to 40% for 2018 and 30% for 2019. This break will disappear in 2020 if lawmakers don’t extend it again.
- Both new and used assets are eligible for Sec. 179 expensing, but only new assets are eligible for bonus depreciation.
- Qualified off-the-shelf computer software is eligible for both Sec. 179 expensing and bonus depreciation.
- A lower Sec. 179 expensing limit of $25,000 applies to vehicles weighing more than 6,000 pounds but no more than 14,000 pounds (generally SUVs). Lighter vehicles are subject to additional limits.
- Bonus depreciation can be taken in addition to regular depreciation.
Thinking about upgrading your facilities? Qualified leasehold improvements, qualified restaurant building and improvements, and qualified retail improvements are now permanently eligible for Sec. 179 expensing. Qualified improvement property is also eligible for bonus depreciation (while it lasts) — and the property doesn’t have to be leased to qualify. In addition, the PATH Act permanently allows companies to use 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant building and improvements, and qualified retail improvements (compared to the 39-year straight-line cost recovery period prescribed under the old rules).
These are just some key factors to know about Sec. 179 expensing and bonus depreciation as you plan your capital expenditures. For more details, please contact us.