By: John Warner and Megan Robinson
As we prepare for the close of 2016 and begin planning for upcoming years, there are significant opportunities with regard to fixed assets, including the ability for taxpayers to immediately deduct 50% of non-residential building improvements.
New in 2016, many of the purchases relating to internal building renovations or upgrades will be eligible for bonus depreciation, which allows an immediate 50% write-off in 2016 or 2017. Purchases treated as Qualified Improvement Property, qualify for this accelerated depreciation including any internal building improvement expenditure that isn't attributable to an elevator, escalator, building enlargement or internal structural framework. This leaves a wide variety of expenditures which do qualify for bonus depreciation, such as improvements to HVAC, lighting, electrical, plumbing, permanent floor coverings, and non-load bearing walls. These types of assets have in the past been depreciated over 39 years for commercial property, but under the new rules, half of the cost of these expenditures can be deducted in the year the assets are placed in service. This could be a significant benefit for any companies with plans to remodel.
The benefit of this accelerated depreciation is time sensitive. 50% bonus depreciation will be available for 2016 and 2017, 40% will be available in 2018, 30% will be available in 2019, and bonus depreciation will go away completely in 2020 (for projects over $1,000,000, the phase out will be pushed back 1 year). Once bonus depreciation is phased out, Qualified Improvement Property will not be eligible for accelerated depreciation deductions.
In addition to building improvements, other assets can be purchased before year end and you can, within the limits of section 179, write off the entire cost of the asset. The section 179 deduction allows a taxpayer to write off, in the year of purchase, up to $500,000 of qualified property. Qualified property includes equipment, machinery, furniture and fixtures, off-the-shelf computer software, qualified leasehold improvements, qualified retail and restaurant property, and air conditioning and heating units. The section 179 limit is phased out, dollar for dollar, once a taxpayer adds more than $2,010,000 of qualified section 179 property during a single tax year. A taxable income limitation might also apply.
Other non-depreciation methods of accounting allow for expensing of certain fixed assets when purchased. The de minimis safe harbor for taxpayers without an applicable financial statement has also changed for tax year starting in 2016. Previously, the de minimis safe harbor limit had been set at $500 for taxpayers who did not have an applicable financial statement. Starting with tax year 2016, the de minimis safe harbor limit for those taxpayers has been increased to $2,500. This means taxpayers without an audit are allowed to deduct in the current period, rather than capitalize, expenditures of less than $2,500 relating to tangible property. This could be significant as the rule applies to each unit of property itemized on an invoice.
The fixed asset rules explained above offer significant year end planning opportunities for businesses. If you have any questions contact your UHY representative. For more information, please contact your local UHY professional, or visit us on the web at www.uhy-us.com