In late December 2015, President Obama signed H.R. 2029, which includes provisions that created the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). The wide-ranging tax law makes permanent or extends three breaks that have proven popular with many taxpayers in the real estate industry. These provisions can make it easier for taxpayers to expense or recover the costs of certain types of property related to their businesses, rather than depreciating them over lengthy recovery periods.
Sec. 179 deduction
Under Section 179 of the Internal Revenue Code (IRC), business taxpayers can immediately deduct — or “expense” — the cost of certain tangible personal property that’s purchased for business use in the year of purchase (for example, computers, office furniture and office equipment) rather than recovering the costs more slowly through depreciation deductions. For 2014, businesses were allowed to deduct up to $500,000 in qualified new or used assets, subject to a dollar-for-dollar phaseout trigger when the cost of all qualifying property placed in service during the taxable year exceeded $2 million.
Before the PATH Act, the deduction and phaseout amounts for 2015 had fallen to $25,000 and $200,000, respectively. The uncertainty created by Congress’s annual late-year extensions of Sec. 179 left some small businesses reluctant to invest in new equipment. But the act makes the 2014 limits permanent (with the limits indexed for inflation beginning in 2016). The provision further modifies the expensing limitation for qualified real property, such as qualified leasehold-improvement property, qualified restaurant property and qualified retail-improvement property. The act eliminates the $250,000 cap beginning in 2016.
If your business is eligible for full Sec. 179 expensing, you could obtain a greater benefit from expensing rather than from bonus depreciation because the expensing provision might let you deduct an asset’s entire acquisition cost. Plus, you can use Sec. 179 expensing for both new and used property, and bonus depreciation might be subject to recapture on disposition of the asset. On the other hand, taxpayers must have net income to take advantage of Sec. 179 expensing.
IRC Sec. 168(k) was also extended but not permanently. The provision, which allows businesses to recover the costs of depreciable property more quickly by claiming bonus first-year depreciation for qualified assets, will run through 2019, with declining benefits each year. For property placed in service during 2015, 2016 and 2017, the bonus depreciation percentage is 50%. It will fall to 40% in 2018 and 30% in 2019.
Businesses can still use Sec. 168(k) to claim unused AMT credits instead of bonus depreciation, and the amount of unused AMT credits that may be claimed increases beginning in 2016. Qualified assets include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified leasehold-improvement property.
As noted above, the Sec. 179 deduction might provide a greater tax benefit than bonus depreciation if you qualify for it. But bonus depreciation may help more taxpayers than Sec. 179 expensing because it doesn’t include a limit on the amount of assets purchased, require net income or phase out at any point. Of course, you must also consider any applicable state tax consequences when purchasing equipment.
15-year straight-line depreciation cost recovery period
The PATH Act makes permanent the 15-year straight-line cost recovery period for qualified leasehold improvements (alterations in a nonresidential building to suit the needs of a particular tenant), qualified restaurant property and qualified retail-improvement property. Such expenditures would otherwise be subject to the 39-year depreciation period.
Finding the best path forward
The PATH Act includes numerous other significant provisions that could affect the taxes of both businesses and individuals. Make sure you contact your tax advisor regarding these changes. He or she can help minimize your tax burden for 2015 and beyond.
Sidebar: Incentive for charitable real estate donations made permanent
The PATH Act made permanent several tax benefits related to charitable giving, including the deduction for contributions of real property for conservation purposes. To be eligible for the deduction, you must contribute a qualified real property interest, to be used only for conservation purposes, to a qualified organization. The organization must have a commitment to protect the donation’s conservation purposes and the resources to enforce the restrictions.
Qualified real property interests include your entire interest in real estate (other than a mineral interest), a remainder interest or a restriction (granted in perpetuity) on the use that may be made of real property. Your deduction is generally limited to 50% of your adjusted gross income less your deduction for all other charitable contributions. The PATH Act allows you to carry forward any contributions you can’t deduct because of this limit for 15 years, up from the previous limit of five years.