By Josie Dillon, CPA
Manager, Tax Services
The Protecting Americans from Tax Hikes Act (PATH) of last year retroactively extended tax year 2015 provisions that had expired. Today we’d like to talk about how that relates to Section 179 tax deductions and bonus depreciation, including ways the state of Indiana does not conform with PATH.
The Section 179 deduction largely affects small- to medium-sized businesses by allowing them to take immediate deductions on the purchase of equipment and software. After PATH the deduction is permanently set at $500,000. Companies that exceed a total of $2 million in qualifying purchases will have the Section 179 deduction phased out dollar-for-dollar until their purchases hit $2.5 million, at which point the deduction will be totally eliminated. Starting in 2016, the phase-out limitation is indexed for inflation.
Section 179 deductions can be taken within the same tax year as purchase, otherwise known as an immediate deduction, as opposed to other types of business deductions that are capitalized through depreciation over a number of years.
Qualifying property must be “tangible personal” property, so real estate does not qualify, nor does intangible property such as copyrights or patents. Qualified real property will see the $250,000 cap eliminated in 2016.
To take advantage of the Section 179 deduction for the 2016 tax year, equipment and software must be purchased and placed in service before the end of the year. So if your organization is considering any needs for equipment or software, it may be wise to act soon.
Another notable change for 2016 is that air conditioning and heating units placed in service this year are now eligible for Section 179 expensing.
Bonus depreciation has been extended until 2019 through PATH, including 50 percent bonus depreciation for certain “New” property placed in service in 2016 and 2017. This phases down to 40% in 2018 and 30% in 2019.
To qualify for bonus depreciation, the property must be (1) tangible depreciable property with a recovery period of 20 years or less; (2) water utility property; (3) computer software; (4) qualified leasehold improvement property.
In March 2016 Indiana Gov. Mike Pence signed Public Law 204-2016, which updates the state’s conformity date of the Internal Revenue Code to January 1, 2016. As a result, Indiana differs in some ways with federal deductions extended by PATH.
On Section 179, Indiana has an expensing limitation of $25,000 and a phase-out limitation of $2 million. Federal 179 deductions taken in excess of $25,000 must be added back to the Indiana return.
Indiana does not recognize bonus depreciation; therefore, the federal deduction taken for bonus depreciation must be added back to the Indiana return.
Other states besides Indiana may or may not conform to the federal PATH provisions. We would be happy to consult with you on details for other state filings.
If we can assist you with any tax-related issue, please contact Josie Dillon at (317) 613-7841 or email [email protected].