The tax code includes Section 179, which permits first-year deduction (expensing) of amounts spent for business equipment. This provision formerly allowed annual deductions up to $25,000. After $200,000 of equipment outlays, the allowance phased out, dollar-for-dollar.
Congress had raised these amounts sharply in recent years but the increases expired periodically, going back to the original amounts. The latest expiration occurred at the end of 2014, so the smaller limit was officially in effect until passage of the Protecting Americans from Tax Hikes Act (PATH) Act in late 2015.
Now, the higher Section 179 limits are permanent. For 2015, expensing up to $500,000 of equipment is allowed, and the phaseout does not begin until $2 million worth of purchases. Both the $500,000 and $2 million amounts will be indexed for inflation, starting in 2016.
Example 1: ABC Corp. spent $600,000 on equipment in 2015. The company can deduct $500,000, the permanent Section 179 cap, while the other $100,000 can be depreciated under other rules.
Example 2: XYZ Corp. spent $2,100,000 on equipment in 2015. That is $100,000 more than the $2 million limit, so Section 179 expensing is reduced by that $100,000, from $500,000 to $400,000. If the company expenses $400,000, it can depreciate the remaining $1,700,000 under other rules.
The PATH Act includes off-the-shelf computer software as Section 179 property, which was not always the case.
Beyond expensing under Section 179, ‘bonus’ depreciation has allowed additional first-year depreciation deductions for amounts spent on certain business equipment. That provision, which expired after 2014, has not been made permanent; instead, it was extended through 2019. For 2015 through 2017, 50 percent of the relevant cost may be deducted. That number will fall to 40 percent in 2018 and 30 percent in 2019.
R&D tax credit
The PATH Act also gave permanent status to the research and development tax credit (R&D credit), retroactive to 2015. This credit can be used by companies that increase their qualified research expenses. Qualified research expenses includes the costs of in-house qualified research and amounts paid to outside contractors for qualified research. If the credit cannot be used currently, it can be carried forward or transferred in an acquisition.
Technology-based companies may be the main users of this tax credit but firms in all fields may get some benefit. Tracking R&D costs to qualify for the credit can be complex, however.
Cadillac health plans
As part of the Affordable Care Act, employer-provided health insurance deemed to provide excessive benefits will be subject to a special tax. This tax was supposed to take effect for tax years beginning after 2017, but the PATH Act postpones the start date for two years. This gives employers more time to evaluate their health plans and phase in any changes.
In addition, the new tax law provides that a company paying the so-called ‘Cadillac’ plan tax will be able to deduct the amount paid from its income tax. Thus, the actual cost of the Cadillac plan tax may be reduced.
Our office can help your business set up the procedures to make the most of this tax break.