On Friday, December 18th, 2015 President Obama signed into law a bill, the PATH Act, which addressed tax extender provisions that had expired during the course of the past year. The bill retroactively extends into law a host of key expired individual, business and energy tax breaks. Some provisions have been temporarily extended; others have been made permanent.
The tax code includes Section 179, which permits first-year deduction (expensing) of amounts spent for business equipment. After $500,000 of equipment purchases, the allowance is phased out, dollar-for-dollar. For 2015, expensing up to $500,000 of equipment is allowed, and the phase out doesnâ€™t begin until $2 million of purchases. Both the $500,000 and $2 million amounts will be indexed for inflation, starting in 2016.
ABC Corp. spent $600,000 on equipment in 2015. The company can deduct $500,000, the permanent Section 179 cap, while the other $100,000 can be depreciated under other rules.
XYZ Corp. spent $2,100,000 on equipment in 2015. Thatâ€™s $100,000 over the $2 million limit, so Section 179 expensing is reduced by that $100,000, from $500,000 to $400,000. If the company expenses $400,000, it can depreciate the remaining $1,700,000 under other rules.
The PATH Act includes off-the-shelf computer software as Section 179 property, which was not always the case.
R&D tax credit
The PATH Act also gave permanent status to the research & development tax credit (R&D credit), retroactive to 2015. This credit can be used by companies that increase their qualified research expenses. Qualified research expenses includes the costs of in-house qualified research and amounts paid to outside contractors for qualified research. If the credit canâ€™t be used currently, it can be carried forward or transferred in an acquisition. Technology-based companies may be the main users of this tax credit, but firms in all fields may get some benefit. Tracking R&D costs to qualify for the credit can be complex, however. Our professionals can help your business set up the procedures to make the most of this tax break.