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Do you need to replace outmoded or worn-down equipment used in your small business? Thanks to the Protecting Americans from Tax Hikes (PATH) Act, which was signed into law late last year, you may be entitled to double-barreled tax relief.
However, to ensure that you qualify for the tax benefits on your 2016 return, you must place the equipment in service before the end of the year.
The two key tax breaks for depreciable business property are the Code Section 179 allowance and the bonus depreciation deduction.
1. Section 179 allowance. Under Section 179 of the tax code, a business can elect to currently deduct the cost of qualified new or used business property placed in service, up to a specified annual maximum. Thus, your business benefits from a near-immediate write-off for equipment purchases.
This tax break may be claimed by any type of business entity, including corporations, partnerships, and LLCs – even sole proprietorships.
The full deduction is available for property placed in service anytime during the year. However, deductions are limited to your annual taxable income from your business operations, subject to a dollar-for-dollar phase-out above an annual threshold.
Fortunately, the PATH Act retroactively preserves to 2015 a permanent maximum $500,000 deduction and a $2 million phase-out threshold, with inflation indexing beginning in 2016. Without this legislation, the maximum would have reverted to just $25,000 with a $2 million phase-out threshold. For 2016, the maximum deduction remains at $500,000, while the phase-out threshold increases to $2,010,000.
2. Bonus depreciation deduction. In addition to the Section 179 allowance, a business can claim bonus depreciation for qualified new (but not used) property placed in service this year. This tax break was also retroactively preserved for 2015 and extended by the PATH Act.
For these purposes, qualified property includes business property with a cost-recovery period of 20 years or less, depreciable software that is not amortized over 15 years, qualified leasehold improvements, and water utility property.
Currently, the 50 percent bonus depreciation deduction is set to gradually decrease, before expiring again. The schedule is as follows:
- 50 percent for 2015 through 2017.
- 40 percent for 2018.
- 30 percent for 2019.
After 2019, the bonus depreciation tax break will again expire, unless Congress reinstates it in time.
The bottom line is take advantage of this two-way tax break while you can. Note: You can’t simply claim the deductions for 2016 by taking the equipment out of the box or carton. You must actually get it up-and-running before the end of the year.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...