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TAX TALK: Extension Means Businesses Can Take Bonus Depreciation on Their 2015 Returns – But Should They?

Posted by Hal Zemel, CPA, J.D., LL.M. on Feb 8, 2016 7:00:00 AM
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The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) extended 50% bonus depreciation through 2017. Bonus depreciation allows businesses to recover the costs of depreciable property more quickly by claiming additional first-year depreciation for qualified assets.

The break had expired December 31, 2014, for most assets. So the PATH Act may give you a tax-saving opportunity for 2015 you wouldn’t otherwise have had. Many businesses will benefit from claiming this break on their 2015 returns. But you might save more tax in the long run if you forgo it.

What assets are eligible?
For 2015, new tangible property with a recovery period of 20 years or less (such as office furniture and equipment) qualifies for bonus depreciation. So does off-the-shelf computer software, water utility property, and qualified leasehold-improvement property.

Acquiring the property in 2015 isn’t enough, however. You must also have placed the property in service in 2015.

Should you or shouldn’t you?
There are many factors that may impact your decision to claim or elect out of bonus depreciation. You will want to consider your current and future expected income tax brackets. If you’re eligible for bonus depreciation and you expect to be in the same or a lower tax bracket in future years, taking bonus depreciation (to the extent you’ve exhausted any Section 179 expensing available to you) is likely a good tax strategy. It will defer tax, which generally is beneficial.

But if your business is growing and you expect to be in a higher tax bracket in the near future, you may be better off forgoing bonus depreciation. Why? Even though you’ll pay more tax for 2015, you’ll preserve larger depreciation deductions on the property for future years, when they may be more powerful — deductions save more tax when you’re in a higher bracket.

You will also want to consider if you are currently in the Alternative Minimum Tax (“AMT”), as any asset that you claim bonus depreciation on will not result in an AMT depreciation adjustment. Also, you should be aware of state tax implications as most states do not allow bonus deprecation.

We can help.
If you’re unsure whether you should take bonus depreciation on your 2015 return — or you have questions about other depreciation-related breaks, such as Sec. 179 expensing — contact me at hzemel@berdonllp.com or your Berdon advisor.  

Topics: TAX TALK

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