An important piece of tax legislation was passed in late 2015 and then signed into law by the president. Several tax provisions that had been temporary were made permanent. A noteworthy part of the legislation changes how quickly businesses can write off the cost of heating and air-conditioning equipment.
The Protecting Americans From Tax Hikes Act is better known by its acronym PATH. Up until passage of the PATH Act, the cost of HVAC equipment could not be written off as quickly as some other types of machinery and equipment. Before 2016, the write-off for HVAC equipment was limited to regular depreciation.
Basic depreciation
Depreciation is an expense allowed for the gradual obsolescence of an asset. Before taking depreciation as an expense, many types of machinery and equipment are eligible for a quicker up-front deduction permitted by section 179 of the tax code. The PATH Act added HVAC units to the types of assets eligible for the section 179 deduction.
Maximum section 179 deduction
The section 179 deduction is available to most businesses, regardless of size. However, there is a specific limitation on the amount of the deduction. Up to $500,000 of the cost of eligible assets may be deducted in the year of acquisition. If the amount of new assets potentially eligible for section 179 treatment exceeds a specific threshold, your maximum deduction amount is reduced.
Effect of total assets purchased
The $500,000 maximum is reduced dollar-for-dollar to the extent that your total eligible assets exceeds the threshold. The PATH Act calls for indexing the section 179 threshold to account for inflation. In 2015, the threshold remained at $2 million. For 2016, the threshold rose to $2.01 million. As a result, the maximum section 179 deduction is reduced in 2016 if new assets eligible for the deduction exceed $2.01 million.
The phase-out based on the amount of new asset acquisitions effectively prevents the largest corporations from taking a section 179 deduction. The section 179 deduction is optional and can only be taken in the year of acquisition. For a smaller business, the cost of new HVAC units might be written off in a single year, leaving none of the cost to deduct over several years using regular depreciation.
If the section 179 deduction exceeds net income, the excess can be carried forward to following years. If you choose not to take the section 179 deduction, more regular depreciation is available in future years. Contact an accountant like Herman & Cormany for more information about the specific types of assets eligible for section 179 tax treatment.
Share26 September 2016
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