The “Protecting Americans from Tax Hikes (PATH) Act of 2015” has impacted businesses across the country – including oil and gas companies and investors. While many of the changes in PATH are friendly to taxpayers, we believe the retroactive permanent extension of the enhanced Code Sec. 179 expensing rules and the five-year extension of the bonus first-year depreciation can be among the most beneficial to oil and gas companies in terms of depreciations on lease and well equipment placed in service.
These changes allow companies to accelerate a depreciation expense on qualifying properties in the first year instead of depreciating it over longer periods of time (generally seven years). Depreciation is allowed once a property is “placed in service,” which for well and lease equipment is when the entire well is completed and made ready for production.
The PATH act has extended bonus depreciation through 2019 for new properties only (qualified property acquired and placed in service during 2015 through 2019).
The depreciation phase-out schedule is:
50 percent for qualified property placed in service 2015-2017
40 percent for qualified property placed in service 2018
30 percent for qualified property placed in service 2019
0 percent for 2020
Unlike the Section 179, there is no deduction limitation and the bonus depreciation is automatic.
PATH has permanently extended Section 179 expensing. Taypayers can elect to expense qualifying capital expenditures, either new or used (unlike bonus depreciation, which requires the property be new). The maximum limit is $500,000 on deductions and there is a $2 million phase-out, both of which are indexed for inflation starting in 2016.
Unlike the bonus depreciation, taxpayers need to elect Section 179. To claim a benefit from Section 179, taxpayers must have positive income from their trade or businesses. Additionally, businesses with partners/members that are estates or trusts should be cautious not claim Section 179, as estates/trusts are prohibited from claiming this type of an expense. An estate or trust, however, can claim bonus depreciation.
What should taxpayers do?
We encourage you to contact a tax professional to discuss how current bonus depreciation rules and/or Section 179 can impact your tax situation. Our LaPorte tax professionals can provide guidance related to the current changes to depreciation provisions and how these changes will affect your business or investments. We can also help you as you begin planning to maximize tax benefits on your transactions in the next few years.
To examine how you can benefit from one or all of these tax-saving opportunities, we strongly encourage you to contact and consult with a trusted CPA or tax advisor in the LaPorte Energy Industry Group.