The PATH Act addressed temporary tax provisions that had become known as “tax extenders.” These extenders were originally passed as temporary measures but Congress had consistently extended them, often near the end of the year in which they applied. Congress’ inaction meant businesses had to make asset purchasing decisions without knowing the tax implications. The PATH Act finally made the extenders (mostly) permanent.
One of the tax provisions made permanent was the Section 179 deduction that allows businesses to elect to deduct the full cost (up to a certain limit) of an asset in the year it is purchased and placed in service. The deduction is a big advantage as it provides for an upfront tax deduction rather than spreading the deduction over a number of years, providing for immediate tax savings related to the purchase of an asset.
The annual allowable Section 179 deduction amount differed in prior years, but the PATH Act extended the expense and annual qualifying purchase phase out thresholds. Businesses can now plan to deduct up to $500,000 of the cost of qualifying assets, although the deduction will be phased out (dollar for dollar) for qualifying purchases exceeding $2,000,000. Therefore businesses that place in service more than $2,500,000 of Section 179 assets in one year may not take a Section 179 deduction. These dollar amounts will be increased for inflation for taxable years beginning after 2015.
Congress reintroduced the concept of Bonus Depreciation in 2008, after expiring in 2005, as part of the Economic Stimulus Act. The reintroduction was in response to the financial crisis as a way to encourage investment by small businesses. Bonus Depreciation, historically considered temporary, had been renewed by Congress every year since but was again set to expire at the end of 2015.
The passage of the PATH Act extended Bonus Depreciation for qualifying assets placed in service through 2019 but with a plan to phase out the provision beginning in calendar year 2018. The phase out looks like this:
- For qualifying assets placed in service in 2015 through 2017 the 50% deduction remains;
- For qualifying assets placed in service during 2018 the deduction is reduced to 40%; and
- For qualifying assets placed in service during 2019, the deduction is further reduced to 30%.
Absent further legislation, Bonus Depreciation would expire at the end of 2019. Special rules apply to certain long-lived and transportation assets, which generally add one year to the above phases.
In prior years, Bonus Depreciation was available for certain building improvement property (“qualified leasehold improvement property”), which met specific standards. The PATH Act removed “qualified leasehold improvement property” from the definition of qualified property, and implemented a new category known as “qualified improvement property”, defined as:
Qualified Improvement Property
Any improvement to an interior portion of a building that is nonresidential real property if such improvement is placed in service after the date such building was first placed in service, so long as the improvement is not attribute to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.
The more generic definition expands the types of building improvement property that may qualify for Bonus Depreciation and removes some of the notable restrictions. Under the pre-2015 PATH Act law, building improvements had to be made pursuant to a lease, either by the lessee or lessor, to be considered qualifying property eligible for Bonus Depreciation. As the new name suggests, Qualified Improvement Property need not be subject to a lease in order to qualify for Bonus Depreciation. Also under the pre-2015 PATH Act law, was the requirement that the improvement be made more than 3 years following the date in which the building was first placed in service. That requirement no longer exists. The Code now states that the improvement must be made after the building has been placed in service, with no specific timeframe stated. And finally, improvements benefiting common areas are now no longer excluded from the definition of qualified property.
The PATH Act made a number of beneficial changes for businesses to take advantage of accelerated expensing of capital expenditures. Where in the past there was uncertainty whether or not Congress would extend Section 179 and Bonus Depreciation, businesses may now make informed asset purchasing and tax planning decisions. The PATH Act also eased restrictions on what building improvements qualify for Bonus Depreciation, which is a great benefit for the real estate industry. However, decisions to make those improvements may need to be made sooner rather than later with the looming phase out of Bonus Depreciation.