If you are part of the plant production management team, you are always looking for ways to increase throughput and lower maintenance down times. Of course, one of the go-to year-end capital expenditures strategies is to utilize a CAPEX budget in Q4 to purchase machines, equipment, or do a significant retrofit of existing equipment.
In addition to the return on assets analysis requested by the CEO and CFO, you also have to predict an elusive variable of “the potential tax savings implication in 2015.”
Unfortunately, answering this question has become a variable that might be best handicapped by Vegas and not by a production manager.
The bad news.
There is no definite bright line that will allow you to know with a high degree of certainty if the Sec. 179 dollar limit for expensing will be $25,000 or $500,000 in 2015.
There is also not a definite way to know if 50% bonus depreciation is available or unavailable by the end of the year 2015.
The good news and current status.
In July 2015, the Senate Finance Committee voted to extend bonus depreciation and the enhanced section 179 deduction through 2016. The full Senate has not indicated if or when it will act on this legislation and the House is not scheduled to act on extender legislation until late 2015. However, if passed this will create planning certainty for 2 years.
In addition, in September, the House Ways and Means Committee passed HR 2510, a bill by Congressman Pat Tiberi (R-Ohio) that proposes to go a step further and make 50% bonus deprecation a permanent part of the tax law and not part of a sun setting extender that has to be renewed annually.
There is considerable support for this bill from a strong ally, Representative Paul Ryan. Ryan wields considerable influence in the house as both Chairman of the House Way and Means Committee and as the newly elected Speaker of the House. Ryan has publicly supported the bonus depreciation incentive and its impact on investing in making manufacturers and businesses more productive.
As House Ways and Means Chairman Paul Ryan (R-Wis.) put it at today’s markup, “H.R. 2510 is about small-business people refurbishing their store or manufacturers buying new equipment. They aren’t earning income. They’re investing in our country. They’re investing in our children. They’re creating jobs. This is exactly what our tax code should support.”
So staying fluid and flexible is the name of the game. We are advising our clients to not rely on bonus for 2015, but we give it our personal handicap score of somewhere north of 60% chance of passage over the next 30-40 days before Congress adjourns for the holidays.
Maximizing deductions for a year-end acquisition.
(This is an example from the Congressional Research Center using 2014 tax rules and regulations since we do not yet have the new regulations for 2015.)
In the case of assets that were eligible for both bonus and section 179 expensing allowances, a taxpayer may recover their cost in the following order. The Section 179 expensing allowance would be taken first, lowering the taxpayer’s basis in the asset by that amount. The taxpayer then could apply the bonus depreciation allowance to the remaining basis amount, further reducing their basis in the property. Finally, the taxpayer was allowed to claim a depreciation allowance under the MACRS for any remaining basis, using the double-declining balance method.
A simple example from a 2014 acquisition illustrates how this procedure might work. Assume that a company made an acquisition of a new CNC laser cutter system at a total cost of $700,000. Such a purchase qualified for both the Section 179 expensing and bonus depreciation allowances for that year. Therefore, it was permitted to recover that cost for federal tax purposes as follows:
- First, the company could take a Section 179 expensing allowance of $500,000 on its federal tax return for that year, lowering its basis in the property to $200,000 ($700,000 -$500,000).
- Then it could claim a bonus depreciation allowance of $100,000 ($200,000 x 0.5), further lowering its basis to $100,000 ($200,000 -$100,000).
- Next, the company was allowed a deduction for depreciation under the MACRS on the remaining $100,000. Given that the MACRS recovery period for laser cutters is five years and five-year property is depreciated using the double-declining-balance method, the company could claim an additional depreciation allowance equal to 20% of $100,000, or $20,000, using the half-year convention. ( this presumes no mid-quarter convention issues)
- The company could recover the remaining basis of $80,000 ($100,000 -$20,000) by taking MACRS depreciation deductions over each of the next five years at rates of 32%, 19.2%, 11.52%, 11.52%, and 5.76%, respectively. ( this presumes no mid-quarter convention issues)
- Thus, the company was able to write off nearly 89% of the cost of the CNC laser cutter in the same year it was purchased and placed in service.
Key Points to Remember for Year-end Planning
This is not an all-inclusive list – instead key points to remember before pulling the trigger on any capital expenditure before year-end.
- Only 50% of cost is eligible for bonus depreciation
- Bonus is not available for USED equipment
- Not all states acknowledge or utilize bonus depreciation or Sec. 179
- Newly constructed or original use property with a recovery period of 20 years or less (real or personal), qualified leasehold improvements, certain computer software, and water utility property is eligible for bonus depreciation. The only new property is eligible for bonus depreciation; used property is not eligible.
- Qualified leasehold improvements are generally bonus eligible if made under a lease to the interior portion of a building occupied by a tenant and placed in service more than three years after the building was first placed in service.
We generally advise our manufacturing clients during year-end tax planning to avoid making long-term decisions based on tax allowances, but it can be a strong incentive due to the significant cash flow savings in March when the final year-end tax bill is tabulated.
If your current tax advisor hasn’t talked to you this year about bonus deprecation, LIFO, cost segregation or R&D credits and how they could impact your business in 2015 and 2016, then let us help. We’re tax experts.
Blog post written by: Gary Jackson, CPA, Tax and Consulting Partner
