Tax News: Depreciation Changes and Bad Business Debts

Changes ahead

Section 179 Depreciation Changes

Did you know that a recent law made changes to the section 179 expensing election for 2016? These modifications took effect as of January 1. Here’s what to consider as you make asset purchasing decisions this year.

  • Change #1.
    Beginning in 2016, section 179 is indexed for inflation. This year, the basic section 179 expensing limit will be $500,000. That limit is reduced dollar-for-dollar once your purchases exceed $2,010,000.

  • Change #2.
    The definition of “section 179 property” now permanently includes computer software and real property such as qualified leasehold and retail improvements and restaurant property. That means you can elect to use section 179 expensing when you purchase those assets.

  • Change #3.
    You may be able to deduct more of qualified leasehold and retail improvements and restaurant property in 2016. Beginning this year, the law eliminated the $250,000 cap on the amount of section 179 you could claim for this property.

  • Change #4.
    Beginning in 2016, air conditioning and heating units are eligible for section 179 expensing. Contact us for help in maximizing the section 179 deduction for your business asset purchases.

Are Bad Business Debts a Tax Deduction?

If you’re in business long enough, you’ll run into a customer who doesn’t pay you. Despite your best efforts, you may conclude that you’ll never receive the money. Do you have a tax-deductible bad debt? The
answer depends in part on whether you operate your business using the cash or accrual method of
accounting.

  • Cash
    When you use the cash method, you report taxable income when you receive it and deduct expenses when they are actually paid. While this makes your bookkeeping simple, you get no direct deduction for a bad debt. Since the income was never received, it was never reported or taxed. However, you will still be able to indirectly deduct the labor, merchandise, and overhead used to provide for the goods or services that were delivered but not paid for.

  • Accrual
    Under the accrual method, you report income when you send an invoice to the customer. Expenses are deducted when they are due, regardless of when you pay them. This method is more complicated than the cash method, since you must track accounts receivable and accounts payable. However, because you report taxable income when you bill your customers, you have a bad debt deduction that you can claim as an operating expense if your customers fail to pay.

For more information about depreciation changes and accounting for bad debts, please contact us.

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