The IRS continually modifies the rules for depreciation of fixed assets. It seems like such a simple concept—you purchase a piece of equipment and you write it off over a certain number of years. However, that is much too easy for our tax code, and it cannot be allowed to stand. Fortunately, the dizzying variations of this simple concept are generally to the taxpayer’s advantage, so knowledge of these rules is essential in lowering taxable income. Here are some of the most important changes that have recently come to pass.
Repair Regulations. Effective January 1, 2014, the IRS dramatically changed the rules for determining what should be capitalized (depreciated) and what can be expensed. These rules are known as the Repair Regulations, or the Tangible Property Regulations. This article cannot possibly contain all of the information contained therein, but one item of significant benefit, the De Minimis Safe Harbor Election, works as follows: From one vendor you purchase 20 printers at $250 each, and 20 laptops at $500 each, for a total of $15,000. If the invoice supports the per-item pricing (not just a lump sum $15,000), then the entire $15,000 can be deducted, NOT capitalized. The de minimis is $500 for 2014 and 2015. If you issue audited financials, then the de minimis jumps to $5,000 per item. In 2016, the $500 de minimis increases to $2,500 per item. This applies to all purchases of tangible personal property (TPP), such as small tools. This is accepted in New York State. Please consult your tax advisor regarding the election and the proper documentation required by the IRS.
Section 179. This has been around for a while, but is has just been made permanent. This election allows the expensing of TPP with lives of three, five and seven years. The amount you can expense is $500,000, but it phases out, dollar for dollar, for purchases over $2 million. For example, you acquire equipment of $2.1 million in 2015. The amount that can be expensed is $400,000. New York State follows the federal rules. There are income limitations both at the company and individual levels, so please consult your tax advisor. See below for special rules for real property.
Bonus Depreciation. This has also been around for a while, but it has gone in and out, and up and down, since it first came into existence in 2001. Bonus depreciation must be taken unless you elect out of it. There are no income limitations. It can only be used for brand new property. New York State does not allow bonus. The IRS has extended it for five years, as follows: 50 percent for assets placed in service from 2015 to 2017; 40 percent for assets placed in service in 2018; and 30 percent for assets placed in service in 2019. Property with lives of three, five, seven, 10, 15, and 20 years are subject to bonus. Again, please consult your tax advisor. See below for special rules for real property.
Special Rules for Real Property. In December 2015, the PATH act of 2015 was passed (no kidding, it stands for Protecting Americans from Tax Hikes). The PATH act made permanent three types of Qualified Property: Qualified Leasehold Improvement Property (QLI), Qualified Restaurant Property (QRP) and Qualified Retail Improvement Property (QRIP). These types of property can be depreciated over 15 years (not 39). QLI is bonus depreciation eligible. QLI, QRP, and QRIP can elect Section 179 expensing of up to $250,000 in 2015, increasing to $500,000 for 2016 and beyond. See your tax advisor for the specifics of qualified property.
As always, you should contact your tax advisor for an analysis of your depreciation and capitalization methods.
John Fontanella is a principal based out of our Syracuse, NY office.