New law enhances manufacturers’ tax benefits

Manufacturers got a Christmas present from Washington, D.C., in December.

Congress passed the Protecting Americans from Tax Hikes (PATH) Act of 2015 and President Obama signed it into law. The legislation includes two significant provisions affecting small and medium-sized manufacturers.

The Section 179 expensing deduction and bonus depreciation laws, which have been up for grabs in previous tax bills, have been put into place permanently. The 179 expensing law had been dramatically tightened for the 2015 tax year, dropping down to $25,000 from the $500,000 allowed in 2014. The PATH Act restored the $500,000 deduction limit starting in 2016 and continuing in ensuing years. For businesses that spend a total of $2 million for qualifying equipment, Section 179 deduction will phase out dollar-for-dollar and be completely eliminated above $2.5 million.

As a bonus, Congress allowed the $500,000 and $2 million amounts to be indexed for inflation going forward, which was not the case in the past. The IRS will index the depreciation amount in $10,000 increments in future years. The agency has yet to announce this figure.

Further plumping up Section 179, legislators permanently defined off-the-shelf computer software as qualifying property. (Software was always included on a temporary basis in the past.) Air-conditioning and heating units were even included as qualifying property. The provision also makes permanent the treatment of qualified real property as eligible under Section 179.

The PATH Act also dresses up bonus depreciation rules while slimming them down a bit as well. The most noteworthy change is a reduction in the current 50 percent rate that companies have been eligible to take in additional depreciation in the first year an asset is placed in service. That will be reduced by 10 percent per calendar year, dropping to 40 percent in 2018 and 30 percent in 2019.

On the positive side, additional first-year depreciation will be allowed for qualified improvements to property without regard to whether the improvements are to property subject to a lease. Plus, the requirement that the improvement must be placed in service more than three years after the date the building was first placed in service is jettisoned.

Additionally, the provision modifies and extends the election to increase the alternative minimum tax (AMT) credit limitation in lieu of bonus depreciation for five years to property placed in service before January 1, 2020.

For more details about all the provisions in the PATH Act, visit here.