Among the tax provisions included in the Protecting Americans from Tax Hikes (PATH) Act of 2015 are sections that make permanent the enhanced Internal Revenue Code (Code) section 179 expensing and phaseout limits and the 15-year write off for qualifying retail, restaurant, and leasehold improvements, as well as extend bonus depreciation for five years. The PATH Act also provides a retroactive extension for various other business depreciation provisions.
Making Permanent the Enhanced Section 179 Ceiling and Phaseout
Section 179 of the Code allows taxpayers to elect to deduct rather than capitalize and depreciate up to a specified amount of the cost of new or used tangible personal property (section 1245 property) placed into service in the taxpayer’s trade or business during the tax year. Section 179 allows for a maximum amount of annual expensing that is reduced dollar-for-dollar by the amount of section 179 property placed in service during the year in excess of a specified investment ceiling. Section 179 property placed in service in excess of this limitation cannot be carried forward and expensed in a subsequent year but must be capitalized and depreciated.
Under law effective for tax years beginning in 2014:
- The dollar limitation on the expensing deduction was $500,000
- The investment ceiling was $2 million
The 2014 limits entirely phased out section 179 expensing when the cost of section 179 property exceeded $2.5 million ($2 million investment ceiling plus $500,000 dollar limitation).
Prior to the enactment of the PATH Act, the limits dropped for tax years beginning in 2015 to:
- $25,000 dollar limitation
- $200,000 investment ceiling
This resulted in a total phaseout for section 179 of $225,000.
The PATH Act retroactively restored the 179 limitations for the 2015 tax year to the 2014 levels ($500,000 dollar limit and $2 million investment ceiling) and made such limitations permanent. For all tax years beginning after 2015, both the $500,000 and the $2 million limits will be indexed for inflation.
In addition, real estate, air conditioning and heating equipment, and computer software are permanently added as eligible section 179 property.
Fifteen-Year Depreciation Schedule for Qualified Leasehold, Retail, and Restaurant Property
For tax years before 2015, the 15-year modified accelerated cost recovery system (MACRS) depreciation class included qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property placed in service during the tax year. This provision allowed businesses to depreciate remodeling and other improvements made to their stores over 15 years rather than the standard 39 year schedule. The provision expired to not cover such property placed in service after December 31, 2014.
The PATH Act retroactively extends for 2015 and makes permanent the inclusion of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property in the 15-year MACRS class.
Bonus First Year Depreciation Extended Through 2019
Under prior law, Code section 168 allowed for an additional first-year depreciation deduction equal to 50% of the adjusted basis of qualified property placed in service during tax years beginning in 2012, 2013, and 2014. Property that qualified for this provision is subject to MACRS depreciation classes of 20 years or less.
The PATH Act extends this bonus first-year depreciation on qualified property for property placed in service between 2015 and 2019 at the following rates:
- 50% bonus depreciation allowance for qualified property placed in service in 2015 through 2017
- 40% bonus depreciation allowance for qualified property placed in service in 2018
- 30% bonus depreciation allowance for qualified property placed in service in 2019
Other non-permanent expensing and depreciation extension provisions contained in the PATH Act include: the increased first-year depreciation limit for trucks and automobiles, expensing for qualified film and TV production costs, the inclusion of motorsport racing track facilities in the seven-year straight-line depreciation class, and the classification of qualifying race horses as three-year depreciable property.