The long-awaited and much-anticipated tax extender bill finally passed Congress and was signed by President Obama on Dec. 18, 2015. In case you haven’t sorted through the details, there are several key provisions relevant to farmers, some of which are now permanent. What’s in a name? How about “Protecting Americans from Tax Hikes Act of 2015” or PATH? I guess time will tell if Congress is on the right path.
In addition to the effects on farmers, PATH has numerous other provisions from child tax credits to charitable deductions to IRAs. Let’s focus on the impact this bill has on farmers’ 2015 and 2016 income tax returns.
The tax bill contains a permanent Section 179 expensing election at the maximum $500,000 level, with built-in inflationary adjustment. Yes, you read that right—Section 179 is permanent at $500,000. As you know, prior to passage of the bill, the Section 179 expensing deduction was set to retreat to pre-enormous levels of $25,000. Larger operations exceeding $2 million in qualifying purchases have the Section 179 deduction phased-out dollar-for-dollar and completely eliminated above $2.5 million.
The Section 179 expensing election is available for tangible personal property purchased and placed in service in the current tax year. A unique change for 2016 includes the ability to include air conditioning and heating units as tangible personal property, which makes them eligible for the Section 179 expense election.
A permanent Section 179 expensing provision gives farmers the opportunity to use the election as a tax planning tool for future years. Relying on this provision was a gamble in recent years, including 2015, but it now offers stability for the largest variable on most small and mid-sized operations.
Also extended, though not permanent, is Section 168(k) bonus depreciation or the machine shed write-off. Businesses of all sizes are able to depreciate 50% of the original cost of applicable assets placed in service in 2015, 2016 and 2017. The bonus percentage is reduced to 40% in 2018 and 30% in 2019. Applicable assets are generally new business assets with a MACRS life of 20 years or less.
As a tax accountant who spends countless hours pouring over depreciation schedules, it’s a big deal that most small to mid-sized operations could eliminate depreciation calculations in the near future.
For farmers looking to terminate a C corporation, the law also includes a provision. Section 137 retroactively and permanently reduces the recognition period for built-in gains tax to five years, beginning in 2014.
Through 2019, the tax extender bill includes an enhanced first-year depreciation cap for automobiles and trucks. Under the luxury-auto limitations of Section 280F, depreciation deductions that can be claimed for passenger autos are subject to annual dollar limits. Light trucks or vans are considered passenger automobiles if they have an unloaded gross vehicle weight of 6,000 lb. or less. The PATH act extends the $8,000 increase in the first-year depreciation deduction limitation to 2015 through 2017. For new vehicles placed in-service after 2017, the increase in the depreciation limit will be $6,400 for 2018 and $4,800 for 2019. To take full advantage of Section 179 and bonus depreciation and avoid the luxury-auto limitations, the vehicle you purchase has to have a gross vehicle weight greater than 6,000 lb.
Author Rita Mae Brown once said, “If it weren’t for the last minute, nothing would get done.” Apparently, she had experience with Congress. If you remember, the Tax Increase Prevention Act, which included the tax extenders for 2014, was signed into law on Dec. 19, 2014. I guess Congress is making progress since PATH was signed a whole day earlier in 2015. Fortunately, several of the extenders are now permanent and will allow farmers to use them to plan future capital budgets.