Tax planning for the last few years has been made much more difficult by the ongoing game of chicken between Congress and the White House. Would they agree to extend the first year equipment deduction that allowed most small businesses to deduct the full cost of their equipment in the year purchased?
The last two years they passed this in mid-December, making year-end tax planning tricky at best. A few years back they even passed the law in January and made it retroactive to the beginning of the previous year. This confusion made many of my clients decide to delay purchasing equipment until the law was more settled.
Finally we have the ability to plan knowing what the law will be for the foreseeable future.
On December 18 the “Protecting Americans From Tax Hikes Act of 2015” (PATH Act for short) was passed. It sets the Section 179 deduction permanently at the $500,000 level. Businesses that purchased more than $2 million of equipment will have the limit reduced dollar for dollar until it is completely eliminated above $2.5 million. The limit will be adjusted for inflation in future years.
Surprisingly, the 50 percent bonus depreciation was extended through 2019. Businesses of all sizes will be able to depreciate 50 percent of the cost of equipment acquired and put in service during 2015, 2016, and 2017. The bonus depreciation will phase down to 40 percent in2018 and 30 percent in 2019 before disappearing in 2020 (assuming it isn’t extended again).
These two changes, which apply retroactively to 2015, will save my own clients hundreds of thousands of dollars in taxes every year. Check with your tax advisor to see how you can take advantage of this great tax break in your business.