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2016 Tax Incentives

MoneyGreat News! Congress recently passed a Bill to make Section 179 expensing permanent and Bonus Depreciation available through the end of 2019.

Section 179: This tax deduction allows companies to deduct the purchase price of new or used equipment and software in the year it was purchased and installed, as opposed to depreciating the equipment over the life of the asset. Section 179 allows the first $500,000 of new or used equipment installed to be expensed. There are certain limitations that apply including a $2,000,000 phase-out threshold on total equipment purchased. Additionally, Section 179 may not exceed the taxable income for the year which it is taken.

Bonus Depreciation: The first year depreciation bonus (aka "Bonus Depreciation") is for NEW equipment only. After deducting Section 179 for NEW equipment purchased, customers would then be able to deduct an additional 50% of the remaining balance for new equipment purchased and installed in 2016-2017. It is reduced to 40% in 2018 and 30% in 2019.

These tax law changes allow companies to write off most, if not all, of the equipment cost, which will promote a faster return-on-investment and help customers afford the additional equipment needed.

Example I:

New Production Equipment - $425,000

Tax Deductions for 2016 (Providing total CapEx purchases do not exceed $2MM in 2016, and there is this much in Pre-Tax profits)

Section 179 allows the 1st $500,000 to be deducted: $425,000... 100% of the equipment cost! If the company pays taxes at a rate of 39%, that could be current year tax savings of $165,750!

Example II:

New Equipment Production Line - $1,000,000

Tax Deductions for 2016 (Providing total CapEx purchases do not exceed $2MM in 2016, and there is this much in Pre-Tax profits)

Section 179 allows the 1st $500,000 to be deducted: $500,000
Bonus Depreciation: $250,000 ($1MM - $500k) x 50%
Total Deduction Before Regular Depreciation $750,000

 

Remaining basis is subject to regular seven year depreciation.

If the company pays taxes at a rate of 39%, that could be current year tax savings of $292,500!

Please check with your CPA in order to maximize the benefits associated with these tax law changes.


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