Tax legislation approved near the end of 2015 maintained the ability of small businesses to increase their depreciation deduction for newly purchased assets. Business owners can now plan ahead with a greater degree of certainty about the tax consequences of purchasing machines or equipment.
Depreciation is a yearly tax deduction taken for a portion of the cost of an asset. In addition to regular depreciation, businesses may take two additional deductions in the year that an asset is first placed in service. The additional deduction allowed by section 179 of the tax code was scheduled to be reduced for 2015. The other additional deduction, referred to as bonus depreciation, was scheduled to completely expire at the end of 2014.
The tax legislation kept the section 179 deduction at a higher level for tax year 2015 and made the deduction permanent. Bonus depreciation, also referred to as special depreciation, was extended through 2019.
Section 179 deduction
The maximum section 179 deduction for tax year 2015 was maintained at $500,000 by the tax legislation. The deduction itself is reduced if total asset purchases for the year exceed $2 million. For every dollar of total asset purchases above $2 million, your section 179 deduction limit is reduced one dollar. The deduction phase-out effectively prevents many large companies from taking a section 179 deduction.
If your cost of new asset purchases is less than the section 179 limitation, you can write off the entire amount in one year. For any remaining cost in excess of the section 179 deduction, bonus depreciation may be taken.
The prospects for bonus depreciation were uncertain until the passage of the legislation late in 2015. Bonus depreciation had expired at the end of 2014. The legislation is retroactive and restores bonus depreciation for 2015 and beyond. After reducing the purchase cost of an asset by any section 179 deduction, the bonus depreciation for 2015 is 50 percent of the remaining cost.
Both additional deductions are optional. Any remaining asset cost left after applying the section 179 deduction and bonus depreciation is subject to regular depreciation. The bonus depreciation rate remains at 50 percent through tax year 2018, when it drops to 40 percent. As of now, 2019 is the final year for bonus depreciation, when the rate for it drops to 30 percent.
For a small business, the decision to write off most of the cost of a new asset in a single year likely depends on the level of income for that year. The increased deduction can offset income otherwise taxable for the year. If greater revenue is anticipated in future years, you might prefer to use only regular depreciation now. Contact an accountant like Teri J Henderson, CPA, P.A. for more information about accounting for assets in a small business.