I assume all C-Level executives were aware there was a Tax Extender Bill — with specific focus on Sec 179 and bonus depreciation — that had to be passed before Congress left DC for its holiday break in order to move forward. Well, all I can say is we must have been good boys and girls. Not only did Santa deliver on Sec 179 and bonus depreciation for 2015 and 2016, but the 179 deduction was made permanent and the bonus was extended through 2019, with lower write-off percentages starting in 2018. There were numerous other extensions and changes, as well, but these two are the ones that have a direct impact on equipment manufacturers, equipment dealers with rental fleets and equipment end users.
Finding out in mid-December about the extender 179 and bonus being available for 2015 is kind of a drag. But at least dealers and end users who bought new or used equipment during the year and placed it into service in 2015 have the flexibility to use these tax breaks if they need additional deductions. On the other hand, knowing you have a five-year window to take advantage of these tax breaks makes planning the capital budget or rental fleet changes a little easier — keeping in mind that the tax tail should not be wagging the dog.
Specifically, we have the following extender benefits:
Sec 179 increased to $500,000 with a $2 million phase-out threshold. As a side note, 179 also covers qualified real estate. It can be used for both new and used equipment purchases. These limits for 179 were made permanent (until someone changes them).
Bonus depreciation is extended for five years through 2019. The rate is 50% of the adjusted basis of the property in the first year it is placed in service. The rate decreases to 40% in 2018 and 30% in 2019. Bonus depreciation applies only to new equipment placed in service.
NOTE: These are federal rates for these deductions, which may or may not be available for state tax purposes. It is not uncommon to have a zero federal tax bill and a significant state tax bill in the same year.
Caveats Go Along with Extenders
While these appear to be significant tax benefits, they are only significant if they fit into your tax plan for that year or because you want to recoup taxes paid in previous years (if it is worth it to do so). These rules create quite a complex tax environment that requires extensive planning on what to use and when to use it. It is not easy to plan in this environment and it pays to do it right every year.
Another thing to consider about these deductions is they are mostly deferrals, meaning you are accelerating the depreciation deductions you would have anyway, but over a longer term. So you could find yourself taking advantage of these deductions in years where your tax rates are low, and then when you sell the unit find yourself paying it back at max rates.
This is especially true for contractors planning to transition out of the business in the next few years, because if they sell assets, they will be valued well in excess of their tax value and thus generate a significant tax bite out of the sales proceeds received. I guess in the end, if you take deductions at the max tax rate and then pay it back at the max rate, you may as well take advantage of these breaks if the tax gods show it works. The point here is proper planning is a must regarding both 179 and bonus depreciation.
I have seven summary pages of the Tax Extender legislation. You can ask your CPA to get you a copy of a summary so you can see if any other provision is of use to you in the company or personally. There are a large number of energy tax incentives that may be of use if you are initiating a “green” policy.
There is no mention of like kind exchange (LKE) in the summary, so we can assume this planning procedure is still available for use in 2015 and going forward until we hear otherwise.
I will call it quits now and not get into the other complex tax issues contractors face. They have been discussed previously on numerous occasions.
Any questions, give me a call.
Have a profitable 2016!
