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TAX TALK: Buy Business Assets Now for 2016 Tax Benefits

Hal Zemel, CPA, J.D., LL.M. 12.05.2016 | TAX TALK

You still have time to benefit from two valuable tax breaks for purchasing equipment. It is important that you act quickly, however, because the benefits require that you place the assets in service by the end of the year.

Section 179 deduction

Normally, the IRS requires you to depreciate capital expenditures for equipment over a five- to seven- year period (for some equipment, a longer life may be required). For qualified assets, the Sec. 179 deduction allows businesses to deduct as depreciation up to 100% of the cost of the assets in the year purchased. Sec. 179 can be used for fixed assets, such as equipment, software and leasehold improvements. Beginning in 2016, air conditioning and heating units were added to the list.

The maximum Sec. 179 deduction for 2016 is $500,000. The deduction begins to phase-out dollar-for-dollar for 2016 when total asset acquisitions for the tax year exceed $2,010,000.

Starting in 2010, qualified real property improvements were included as eligible Sec. 179 property, and in 2016, that provision was made permanent. You can claim a Sec. 179 deduction of up to $500,000 for certain qualified real property improvement costs.

In addition to the dollar limitations, the Sec. 179 deduction cannot exceed your taxable income from all of your trades or businesses. Not all states allow Sec. 179 deductions and some states have lower dollar limitations. Estates and trusts are not eligible to take Sec. 179 deductions.

First-year bonus depreciation

For qualified new assets (including software) that your business places in service in 2016, you can claim 50% first-year bonus depreciation. (Used assets don’t qualify.) You depreciate the remaining 50% using the normal depreciation method for the asset. For example, if you purchase a computer for $5,000, you would be allowed to deduct $3,000 in the year of purchase, as this example illustrates:


Purchase Price $5,000
  50%
50% Bonus Depreciation $2,500
   
Remaining Basis to Depreciate
(Purchase Price Less Bonus Depreciation)
$2,500
1st Year Depreciation Rate
(assuming half-year convention)
20%
1st Year Depreciation Rate $500
   
Total Bonus & Regular Depreciation in Year of Purchase $3,000

This break is available when buying computer systems, software, machinery, equipment, and office furniture.

Additionally, 50% bonus depreciation can be claimed for qualified improvement property, which means any eligible improvement to the interior of a nonresidential building if the improvement is made after the date the building was first placed in service. However, certain improvements aren’t eligible, such as enlarging a building and installing an elevator or escalator.

There is no taxable income limitation on the use of bonus depreciation. Many states do not allow bonus depreciation. Estates and trusts are permitted to take bonus deprecation on their trade or business assets.

Contemplate what your business needs now

If you’ve been thinking about buying business assets, consider doing it before year end. This article explains only some of the rules involved with the Sec. 179 and bonus depreciation tax breaks. Contact me at HZemel@BerdonLLP.com or your Berdon advisor us for ideas on how you can maximize your depreciation deductions.

Hal Zemel, a Tax Principal at Berdon LLP, New York Accountants, has more than 20 years in public accounting and advises businesses in the real estate, service, and manufacturing sectors.

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