LOOKING AHEAD: Depreciation Tax Planning Due to the PATH Act

In light of the legislation passed at the end of 2015, known as the PATH Act, several depreciation options need to be considered in 2016 and in planning for the years ahead. Bonus depreciation stays at 50 percent through 2017, then is phased down to 40 percent in 2018, 30 percent in 2019, and finally to zero in 2020 (with a year’s delay for certain longer-lived and transportation property). In April, the IRS released inflation-adjusted Code Sec. 280F depreciation limits for business automobiles, light trucks, and vans placed in service in 2016. For vehicles for which bonus depreciation is allowed, the first-year depreciation limit is $8,000 more than the general non-bonus limits.

In short, Code Sec. 280F provides the maximum depreciation limits for passenger automobiles placed in service in 2016 as follows (with those for light truck and vans being slightly higher):  $3,160 for first tax year; $5,100 for second tax year; $3,050 for third tax year; and $1,875 for each succeeding tax year.  For passenger automobiles in which bonus depreciation rules apply, the first-year limitation is $11,160.

Although bonus depreciation is advantageous to many businesses, the PATH Act also permanently extended Section 179 expensing.  The current limit is set at $500,000 with a $2 million overall investment limit before phaseout.  These amounts will both be indexed for inflation for tax years beginning after 2015.  The IRS announced the inflation adjustment for 2016 included an increase to the overall phaseout limit to $2,010,000 but no adjustment to the $500,000 expensing limit.  The PATH Act has also removed the $250,000 cap related to qualified real property for tax years beginning after 2015.

The PATH Act has also simplified the way small businesses may expense tangible goods. In the past, small businesses were allowed to write off equipment costs of up to $500, rather than carrying them as depreciating assets on their balance sheets. For the 2016 tax year, the IRS will increase the maximum deduction to $2,500. These write-offs must be supported by invoices.

If you have any quesitons on the depreciation limits, Section 179 expensing, or any of the PATH Act legislation, please do not hesitate to contact a member of our team!