Pub. 4 2015-2016 Issue 3

14 San Diego Dealer YOUR PATH TO DRIVE SUCCESS By Sid Tobiason, CPA, Partner and Amy Stillwell, CPA, Senior Manager, Moss Adams LLP T he Protecting Americans fromTax Hikes Act of 2015 (the PATH Act) makes many popular business tax breaks permanent and extends others through 2016 or 2019. Signed into law on December 18, the PATH Act also enhances certain breaks and puts a moratorium on some of the Affordable Care Act’s (ACA’s) controversial taxes. Several provisions in particular may produce significant tax savings for dealerships in 2015 tax reporting and beyond. We’ll look at each of them and how they’ve been modified. Section 179 Expensing Election This allows dealerships to elect to immediately deduct the cost of certain tangible personal property acquired and placed in service, such as service equipment, during the tax year instead of recovering the costs more slowly through depreciation deductions. However, the election can offset only net taxable income, and it can’t reduce income below $0 to create a net operating loss. The election is subject to annual dollar limits. Before the enactment, businesses could only expense up to $25,000 with limitations. The new law: • Makes section 179 deductions permanent with an allowable deduc- tion of up to $500,000 per year. Businesses with asset additions of over $2 million in one year will begin losing the deduction; and if they have asset purchases over $2.5 million they’ll be eliminated from the deduction. • Makes permanent the ability to apply Section 179 expensing to qualified real property, reviving the 2014 limit of $250,000 on such property for 2015 but raising it to the full Section 179 limit beginning in 2016. • Expands the list of qualified real property to include, beginning in 2016, air conditioning and heating units. It’s important to note that the election is limited to $25,000 per year in California. If your business is eligible for full Section 179 expensing, it may provide a greater benefit than bonus depreciation (see below), because the expensing provision can allow you to deduct 100 percent of an asset acquisition’s cost. Moreover, you can use Section 179 expensing for both new and used property. Bonus Depreciation The news is mixed on bonus depreciation, which allows businesses to recover the costs of depreciable propertymore quickly by claiming bonus first-year depreciation for qualified assets. The provision was extended, but only through 2019 and with declining benefits in the later years. For property placed in service during 2015, 2016, and 2017, the bonus depreciation percentage is 50 percent. It drops to 40 percent for 2018 and 30 percent for 2019. The provision continues to allowbusinesses to claimunused alternative minimum tax (AMT) credits in lieu of bonus depreciation. Beginning in 2016, the amount of unused AMT credits businesses may claim increases. Qualified assets include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment). Beginning in 2016, qualified improvement property doesn’t have to be leased to be eligible for bonus depreciation. Note that bonus depreciation is available to a broader set of taxpayers than Section 179 expensing (except for California state income tax, which doesn’t allow for bonus depreciation), because it isn’t subject to any asset purchase limit or net income requirement. Accelerated Depreciation of Certain Qualified Real Property The PATH Act permanently extends the 15-year, straight-line cost recovery period for qualified leasehold improvements (alterations in a building to suit the needs of a particular tenant), and qualified retail-im- provement property. The provision exempts these expenditures from the normal 39-year depreciation period.