Extender from PATH Act means you can take bonus depreciation on your 2015 returns – but should you?
Once again, bonus depreciation has been extended allowing taxpayers to recover the costs of depreciable property more quickly by claiming additional first-year depreciation for qualified assets. The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) extended 50% bonus depreciation through 2017. Many taxpayers may benefit from claiming this break on their 2015 returns however some might save more tax in the long run if they elect out of bonus depreciation.
What type of assets qualify for bonus depreciation?
For 2015, new tangible property with an IRS stipulated depreciable life of 20 years or less (such as computers, office furniture or equipment) qualifies for bonus depreciation. Off-the-shelf computer software, water utility property and qualified leasehold-improvement property also qualifies. The new assets must also have been put in to use in 2015 in order to qualify for any depreciation deduction.
To bonus or not to bonus, that is the question…
Typically, taxpayers always want to maximize their tax deductions in the current year. But wise tax planning calls for considering the effects of this year’s choices on future year’s tax burdens. If a taxpayer has assets that are eligible for bonus depreciation and they expect to be in the same or a lower tax bracket in future years, taking Section 179 deduction first, then bonus depreciation is most likely a good tax strategy. Doing so will defer tax, which generally is beneficial and usually the goal of tax planning.
However, if a business is growing and expects to be in a higher tax bracket in the near future, it may be better off forgoing bonus depreciation altogether. Why? Because it makes sense to decrease deductions in years when a taxpayer is in a lower tax bracket, when they expect to have a higher taxable income in future years. They will need the depreciation deductions more in the years they have higher taxable income, so electing out of bonus depreciation and not taking Section 179 deductions can be a smart tax move. Deductions are worth more when your tax bracket is higher.
Have questions about depreciation? 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 us – we can help.