Suppliers should consider electing to deduct as an expense ̶ rather than to depreciate ̶ the cost of new or used tangible personal property placed in service in 2016 (and certain qualified real property). The tax rules permit expensing up to $500,000 in 2016. This maximum expensing amount is reduced dollar for dollar when expensing-eligible property placed in service in 2016 exceeds $2,010,000 (the investment ceiling). Both the maximum expensing amount and the investment ceiling are adjusted for inflation. For tax years beginning in 2017, the dollar limitation for expensing will be $510,000, and the investment ceiling will be $2,030,000.
The amount expensed under these rules can’t exceed the taxpayer’s taxable income derived from the active conduct of its trade or business. However, any amount not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding tax years.
There is no pro rata reduction of the expensing deduction depending on the portion of the year the asset is placed in service. Property acquired and placed in service at the end of the year is therefore eligible to expense, subject to the limitations described above.
Suppliers should consider the following expensing election strategies:
- Time your equipment purchases to take full advantage of the expensing election. For example, if $400,000 of equipment was placed in service in 2016, and the business will be purchasing additional equipment in early 2017, the business should consider accelerating $100,000 of equipment purchases into 2016 to take maximum advantage of the expensing election.
- Consider maximizing the expensing election even if the taxable income limitation does not permit expensing of the full $500,000 amount (adjusted for inflation) in the year that the assets are placed in service. The excess of the maximum expensing amount over the allowed amount can be carried over and expensed in a later year.
- To maximize the tax benefit of expensing, a business should make the expensing election for eligible property with the longest depreciation recovery period.
If you are interested in learning more about expense deductions and other supplier tax tips, contact Jay Kennedy at 248.784.5180 or jkennedy@wnj.com.
