With fall approaching, now’s a good time to start thinking about steps you can take during the rest of the year to save on your 2016 tax bill. And there’s good news for dealerships: Two key tax breaks that were scheduled to expire have been extended.
By planning now, you may be able to save big tax dollars on purchases of fixed assets and equipment that you make for your dealership before the end of the year. The same goes for remodeling or constructing new dealership facilities.
The PATH to opportunities
The Protecting Americans from Tax Hikes (PATH) Act permanently extended and retroactively reinstated the increased Section 179 expensing limit of $500,000 for qualifying fixed asset purchases. In addition, the act temporarily extended first-year bonus depreciation through the end of 2019.
Most dealerships tend to buy their fair share of fixed assets and equipment, such as computers and software — for example, a Dealer Management System (DMS) — showroom furniture and fixtures, and telecommunications systems. The service department is especially equipment-intensive: Wheel balancers, hydraulic lifts, alignment racks and inspection machines are a few types of new equipment commonly purchased for this area of the dealership.
With the permanent extension of the increased Sec. 179 expensing limit, you can now plan your annual capital expenditure budget with more certainty. Say you’re thinking of spending up to $500,000 this year on qualifying fixed assets such as those listed above. If so, you might want to make purchases and place the assets in service before the end of the year.
The PATH Act also permanently extended the higher annual phaseout threshold of $2 million in qualifying fixed asset purchases that can be expensed. Previously, the annual phaseout threshold was just $200,000. In fact, the $2 million limit is indexed for inflation, and for 2016 the phaseout starts at $2.01 million. Expensing for fixed asset purchases is still phased out on a dollar-for-dollar basis for purchases that exceed the threshold amount, which means that for this year the $500,000 will be reduced between $2.01 million and $2.51 million.
Accordingly, no Sec. 179 deduction is available if the total investment in qualifying property is $2.51 million or more. And the $500,000 limit is also indexed for inflation, although the eligible amount for 2016 hasn’t increased.
Bonus depreciation: Extended for now
The temporary extension of first-year bonus depreciation, meanwhile, allows your dealership to immediately expense 50% of the cost of new property that you buy and place in service this year and next year. In 2018, you can expense 40% of the cost of new equipment, and in 2019 you can expense 30% of the new equipment’s cost. Bonus depreciation ends in 2020, unless Congress extends it again.
Bonus depreciation applies to new (but not used) Modified Accelerated Cost Recovery System (MACRS) property with a recovery period not exceeding 20 years, computer software, water utility property and qualified improvement property. Original use of MACRS property must begin with your dealership.
To take advantage of Sec. 179 expensing or bonus depreciation in 2016, you must buy or finance qualifying fixed assets and place them in service by December 31. This makes the next few months critical in terms of planning your equipment acquisition strategies to maximize your benefits from these two tax breaks.
Maximizing your tax savings
If you’re remodeling your dealership or constructing or buying new facilities, one way to maximize your tax savings is to have a cost segregation study performed. This study will separate individual components in a facility into different categories for depreciation purposes, enabling you to depreciate them faster.
A commercial building isn’t eligible for bonus depreciation because its useful life is greater than 20 years. But by breaking out building components — for instance, the plumbing and electrical, carpeting, parking lot paving, and awnings and canopies — you can take bonus depreciation on them.
For example, a New York Honda dealership recently built a brand new facility at a total cost of $5 million. Conducting a cost segregation study enabled them to reclassify $1.5 million of the costs as tangible personal property and depreciate them over five, seven or 15 years instead of 39 years. As a result, the dealership was able to take 50% bonus depreciation of $750,000, which resulted in a tax savings of approximately $300,000.
Another dealership in Nevada recently decided to install a new DMS and replace some aging equipment in its service department. The total cost of these assets was $400,000, which the dealership was able to take Sec. 179 expensing on and write off immediately. The result: a tax savings of approximately $140,000.
The potential tax savings with Sec. 179 expensing and bonus depreciation are significant. Be sure to consult with your tax advisor for more details on how you can take full advantage of the opportunities.