Businesses that buy eligible business property can use depreciation on their taxes as a tool to spread out the cost of an asset over several years. To encourage business spending, Congress authorized the Section 179 deduction in 2002 to decrease the purchase price and then enable businesses to take bonus depreciation that is currently 50 percent of the remaining cost in the first year. The balance is subject to depreciation the normal way, using methods such as straight-line depreciation. Currently, the benefit is set to fall to 40 percent in 2018 and 30 percent in 2019 before expiring, unless Congress extends it.
Recent Alternatives to Bonus Depreciation
Since Congress passed the Protecting Americans from Tax Hikes (PATH) Act of 2015, taxpayers can invoke Section 168 to claim a refundable minimum tax credit for all years prior to 2016, rather than just for years prior to 2006. To take advantage of the new provision, they must give up their bonus depreciation in return for a refundable credit. For many taxpayers, even those in a loss position, this allows tax savings that far exceed those realized from the bonus credit.
As the graphic shows, the tax savings can be considerable for a company with $50 million in revenue, $500 million in deductions, and $500 million in bonus depreciation. In scenario 1, the company takes the bonus depreciation but does not take the refundable minimum tax and therefore receives no refund. However, in scenario 2, the company receives a $70 million refund after taking the refundable minimum tax credit, but not the bonus depreciation.
How to Determine Your Best Tax Position
The best way to determine the right choice for your company is to examine different scenarios using tax planning software. Seeing the options can prevent unpleasant surprises about what you owe and leverage ideal tax treatment.
Diane Tinney is the director of product management for Bloomberg BNA’s software products, responsible for developing and implementing corporate tax and accounting solutions. Prior to joining Bloomberg BNA, Diane founded several startups, managed a global corporate tax product development team, and worked for KPMG as a senior tax manager...