With the passage of the Protecting Americans from Tax Hikes (PATH) Act of 2015, most equipment, technology, and off-the-shelf software, up to $500,000, can likely be deducted. Any excess above the allowable deduction can be depreciated over five to seven years, depending on the type of equipment. Additional amounts may be expensed as per applicable depreciation schedules.
IRS Section 179 encourages business owners to invest in equipment or technology by allowing them to deduct a substantial amount of the asset's value the first year. Taxpayers who acquire new equipment — including machinery, furniture, fixtures and off-the-shelf software — may be able to deduct up to $500,000, as well as 50% bonus depreciation of qualifying expenses during the first year of ownership. Standard first-year MACRS (Modified Accelerated Cost Recovery System) deduction applies to the remaining amount up to $200,000.
Taxpayers who manufacture goods in the United States ("Domestic Production") can claim a "special" deduction under Internal Revenue Code Section 199. IRS Section 199 encourages Domestic Production or Manufacturing (that is, producing "tangible personal property"). The main benefit to manufacturers is that it allows a deduction from their "Qualified Production Activities Income" (QPAI). QPAI is an income class entitled to favored tax treatment related to manufacturing, constructing or engineering activities. For a business with one business line, this is Gross Income. For a business with multiple business lines, income needs to be allocated.
The effect of the deduction is to reduce the QPAI taxation rate–QPAI is the taxpayer income portion equal to the excess of the taxpayer's domestic production gross receipts over the sum of the cost of goods that are allocable to such receipts, and other expenses, losses, or deductions. Domestic production gross receipts are the gross receipts of the taxpayer derived from any lease, rental, license, sale or exchange (similar to a definition of "Gross Profit").
The QPAI benefit is a 9% deduction of income related to manufacturing. This deduction is limited to 50% of the W-2 wages allocable to the net income related to the activity.
*This information provides general guidance. This is not tax advice. Consult your advisor for individual circumstances.
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