Depreciation Tax Benefits Extended for 2016 and Beyond

Unlike recent years, U.S. businesses are starting 2016 with defined tax depreciation rules for capital equipment acquisitions. As a result, there is no need to postpone acquisitions or to second guess what legislators may, or may not, pass later in the year.  The following summarizes the new rules for tax depreciation:

• The annual deduction limit for the section 179 up-front expensing of equipment purchases is now $500,000. This deduction limit is phased out dollar for dollar when the total amount of equipment acquisitions for the year exceeds $2,000,000.
• Bonus depreciation has been reinstated for tax years 2016 through 2019. The new bonus depreciation rules allow for an additional year-one depreciation rate of 50% for 2016 and 2017, 40% for 2018 and 30% for 2019.

The tax benefits can be significant, as the following sample calculation for 2016 demonstrates:

Equipment Cost	$ 1,500,000
Section 179 first year depreciation	$ 500,000
50% bonus depreciation (on $1 million balance after Sec 179)	$ 500,000
MACRS first year depreciation (5 years – 20%)	$ 100,000
Total 2016 depreciation deduction	$ 1,100,000
2016 Federal income tax savings (assumed 35% tax rate)	$385,000

 

 

Last modified: February 22, 2016