Each year, businesses and their tax advisors have grown accustomed to not knowing what the laws are pertaining to computing depreciation for federal income tax purposes until late in the year. There are more than 50 different “extenders” – various tax provisions that have only been extended for either one or two years at a time. In addition to depreciation items, the list includes the sales tax deduction, educator expense deduction, research tax credit, ability to transfer funds from an IRA to a charity, and various energy credits.

The extenders had expired as of the end of 2013. It took Congress almost all of 2014 to legislate the Tax Increase Prevention Act of 2014, which the president signed into law on December 19, 2014. The various extenders were retroactively reinstated as of January 1, 2014 only to expire once again as of December 31, 2014. As far as depreciation is concerned, the following three provisions affecting many business taxpayers were reinstated for 2014:

• 50% bonus depreciation – for new assets acquired by December 31, 2014
• 179 expense allowing for an immediate fixed asset write-off with certain restrictions – $500,000 limitation (phased out over $2 million – $2.5 million of additions), applicable to new as well as used assets
• 15-year life for qualified leasehold, restaurant and retail improvements with eligibility for bonus depreciation

Due to the expiration of the above three depreciation provisions as of December 31, 2014, the current federal law is as follows:

• No bonus depreciation
• 179 expense limitation of $25,000 (phased out over $200,000-$225,000 of additions)
• 39-year life for qualified leasehold, restaurant and retail improvements

There have been various discussions in Congress this year over the subject of comprehensive tax reform. Some members of Congress have expressed a desire to make some of the extender provisions permanent in order to eliminate the difficulties that exist from constantly expiring tax provisions. In early August of this year, the Senate Finance Committee drafted the Tax Relief Extension Act of 2015. This proposed legislation would reinstate most of the expired extenders for two years through the end of 2016. The fate of this legislation is uncertain. Often, the House of Representatives drafts different legislation from the Senate requiring a conference committee to hammer out a compromise bill to be voted on by both bodies before being sent to the president for signature.

The purpose for enhanced depreciation is to encourage businesses to make investments in fixed assets whether they are computer equipment, furniture & fixtures, machinery, or construction improvements to their business locations. Not knowing what the rules are makes planning nearly impossible, as taxpayers and their advisors can merely assume that these favorable rules will be legislated back into the tax code for 2015.

On the other hand, New Jersey does not provide any uncertainty in this regard. The state has decoupled from bonus depreciation and has never increased Sec. 179 expense beyond the $25,000 threshold. Where federal depreciation has exceeded allowable New Jersey depreciation due to either bonus depreciation or additional Sec. 179 expense, a timing difference has been created. Ultimately, over time the taxpayer gets a 100% depreciation write-off for New Jersey tax purposes. However, it often takes several tax years to achieve this result compared with the immediate write-off obtained for federal purposes from both bonus depreciation and Sec. 179.

Hopefully, the fact that 2015 is not an election year for Congress will result in earlier action on the extenders compared with 2014.

Neil Becourtney, CPA
CohnReznick LLP