That time of year again — tax time — and that means starting to think about possible tax deductions. In December 2015, Congress passed and President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). This bill expanded the Section 179 deduction limit, retroactively, for the 2015 tax year to $500,000. In addition, the 50 percent bonus depreciation was reinstated.
The other good news is that the Section 179 deduction remains permanent at the $500,000 level. Businesses exceeding a total of $2 million of purchases in qualifying equipment have the Section 179 deduction phase-out dollar for dollar, and it is completely eliminated above $2.5 million. Additionally, the Section 179 cap will be indexed to inflation in $10,000 increments in future years. To take advantage of the deduction limit for 2016, all equipment and software must be financed and in place by midnight December 31, 2016.
The 50 percent bonus depreciation will be extended through 2019. Businesses of all sizes will be able to depreciate 50 percent of the cost of equipment acquired and put in service during 2015, 2016 and 2017. Then, bonus depreciation will phase down to 40 percent in 2018 and 30 percent in 2019.
All businesses that purchase, finance, and/or lease less than $2,000,000 in new or used business equipment during tax year 2015 should qualify for the Section 179 deduction.
Most tangible goods including "off-the-shelf" software and business-use vehicles (restrictions apply) qualify for the Section 179 Deduction. Also, the equipment and/or software purchased or financed must be placed into service between January 1, 2015 and December 31, 2015.
Section 179 does come with limits. There are caps to the total amount written off ($500,000 for 2016), and limits to the total amount of the equipment purchased ($2,000,000 in 2016). The deduction begins to phase out dollar for dollar after $2,000,000 is spent by a given business, so this makes it a true small and medium-sized business deduction.
Companies that lease equipment can still take full advantage of the Section 179 deduction. In fact, leasing equipment and/or software with the Section 179 deduction may be the preferred financial strategy for many businesses, as it can significantly help with not only cash flow, but with profits as well. In addition to the equipment
Most tangible business equipment qualifies. Keep in mind that to qualify for the Section 179 Deduction for 2015, the equipment listed below must be purchased and put into use between January 1 and December 31 of the tax year you are claiming:
- Equipment (machines, etc.) purchased for business use
- Tangible personal property used in business
- Business vehicles with a gross vehicle weight in excess of 6,000 pounds. Many vehicles that, by their nature, are not likely to be used for personal purposes qualify for full Section 179 deduction including the following vehicles:
- Heavy “non-SUV” vehicles with a cargo area at least six feet in interior length (this area must not be easily accessible from the passenger area). For example, many pickups with full-sized cargo beds will qualify (although some "extended cab" pickups may have beds that are too small to qualify).
- Vehicles that can seat nine-plus passengers behind the driver's seat (e.g. hotel/airport shuttle vans, etc.).
- Vehicles with: (1) a fully-enclosed driver's compartment/cargo area, (2) no seating at all behind the driver's seat, and (3) no body section protruding more than 30 inches ahead of the leading edge of the windshield. In other words, a classic cargo van.
- Computers
- Computer "off-the-shelf" Software. To qualify, software cannot be custom code. For basic eligibility, the software must:
- Be financed (only specific type leases or loans qualify), or purchased outright by you.
- Be used in your business for income-producing activity.
- Have a determinable useful life.
- Be expected to last more than one year.
- Be readily available for purchase by the general public.
- Be subject to a non-exclusive license.
- Not have been substantially modified.
- Office furniture
- Office equipment
- Property attached to your building that is not a structural component of the building (e.g. a printing press, large manufacturing tools and equipment)
- Partial business use (i.e. equipment that is purchased for business use and personal use. Generally, your deduction will be based on the percentage of time you use the equipment for business purposes.)
- Business travel: If you are on the road for business, airfare, lodging, dry cleaning and 50 percent of your meals can be deducted.
- Startup costs: Are you a new business? You may be able to claim expenses that were incurred before you even launched your business
- Cellphones and landlines: Cellphones and landlines dedicated solely to business use can be deducted.
- Convention and trade shows: Have you attended a trade show directly related to your business? Then you can deduct the cost of participating.