Section 179 Deductions:
Under current law, “taxpayers can recover, through annual depreciation deductions, the cost of certain property used in a trade or business for the production of income. Under Code section 179, taxpayers may deduct immediately the cost of investment in property, equipment, and computer software rather than depreciating costs over the recovery period under the Code.”
For tax years prior to 2015, taxpayers could deduct up to $500,000 of investments in new equipment and property per year, with deductions phased out for investments exceeding $2,000,000. Investments in computer software, certain real property, and air conditioning and heating units were eligible deductions under Section 179. However, real estate deductions were limited to $250,000.
For tax years after 2014, these provisions changed. Section 179 deduction limits were decreased. Taxpayers can now only deduct equipment and property investments up to $25,000 per year, with these deductions phased out for investments exceeding only $200,000. Computer software and the certain types of real property mentioned above are only eligible deductions if they were placed into service prior to January 1, 2015. And investments in air conditioning and heating units are no longer eligible deductions.
If passed, HR 636 would restore and make permanent all Section 179 provisions that were in place for tax years prior to 2015.
With respect to S Corporations, if passed, HR 636 would make permanent the five-year Built-In Capital Gains Period and the Basis Adjustment Rule for shareholders.
- Built-In Capital Gains Period
For tax years after 2014, S corporations are subject to an entity-level tax at the highest corporate rate on certain built-in gains of property the S corporation held while operating as a C corporation. The tax applies to gain recognized within ten years from the date that the C corporation elected to be an S corporation. Through 2014, a temporary provision decreased this period to five years. If passed, HR 636 would make the temporary five-year recognition period on built-in capital gains permanent.
- Shareholder’s Basis Adjustment Rule
When an S corporation contributes money or property to a charity, shareholders take into account their pro rata share of the contribution in determining their personal income tax liability. Shareholders reduce the basis in their S corporation stock by the amount of the S corporation’s charitable contribution that flows through to the shareholder. For tax years prior to 2014, the basis reduction in the S corporation stock was equal to the shareholder’s pro rata share of the adjusted basis of the contributed property. For tax years after 2014, the amount of the reduction is the shareholder’s pro rata share of the contributed property’s fair market value rather than the property’s adjusted basis.
If approved by the Senate, HR 636 would return to the 2014 rule and make permanent the basis-adjustment rule for S corporation shareholders.
Beginning with tax year 2015, Section 179 rules, S Corporations’ Built-In Capital Gains Period, and S Corporations’ Basis Adjustment rule changed. If HR 636 is approved by the Senate and President, it will restore these changes to the December 2014 standards.
The information in this article is for informational purposes only and does not constitute formal, legal advice. Consult with one of the attorneys from Roberts McGivney Zagotta LLC for advice about your particular circumstance.