Oh, good!  I haven’t lost you yet.  Even though there was a weekend separating all these sections.

Today, we’ll continue our discussion of Section 179 (this is depreciation, but of the sort that really lets us write off the entire- or most of- the capital costs in one fell swoop.  Plus, the potential sea change in partnership rules that may affect many in an attempt to handle the new IRS method of auditing the partnerships.

Business Depreciation, continued- Section 179
The PATH Act changed the Section 179 (the capital purchase write-off provisions) Election. For good. The maximum Section 179 write-off is now permanent. (It had been extended for a year or two each time Congress had made a change for a while.) That maximum is also to be adjusted for inflation starting this year, which is why it is now $ 510,000. Moreover, there is a phaseout of the benefit as the amount of new capitalized property exceeds $ 2.03 million, but it is never depleted to zero..

Real Estate
For real estate purchases, the maximum Section 179 exclusion is now also $ 500K. (Last year, it was capped at $ 250K.) This includes HVAC (heating, ventilation, and air conditioning) equipment, which is a new addition. Any recapture of this credit (due to an early sale) is now considered subject to ordinary income taxes.

We now can depreciate real estate over a 15 year period for qualified leasehold improvements, restaurants, and retail improvements. Bonus depreciation is also allowed for the first half of said improvement value (through 2017), decreasing in 2018 to only 40%, 30% in 2019 and removed completely by 2020. The PATH Act also let bonus depreciation apply to 39 year property (for improvements that were already in service by the entity).

Automobiles (Luxury)
The depreciation limits for vehicles is limited to $ 3160 or 20% of the basis in 2016. However, this year one can write off up to $ 8000 in bonus deprecation (which is reduced to $ 6400 in 2018, $ 4800 in 2019 and then removed forever by 2020) for new (not used) automobiles. Of course, these numbers apply only to vehicles that are used completely for business. There is a reduction in this benefit for a purchased vehicle that is not fully attributed to business usage.

Partnerships
The Bipartisan Budget Act (the one bill you’d expect to have tax changes included) has brought a sea change to the way partnerships will be treated, should the IRS find problems with their tax submissions. The changes do not take effect for a few years- but the time to address the changes is really now.

Basically, the Act stipulates that any change that comes about by an audit are to be collected directly from the partnership- unless the partnership elects out of TEFRA (Tax Equity and Fiscal Responsibility Act of 1982). So, it means that partnership formation, operations, new partner admissions, etc. will all have to be reconsidered.

How it changed is this- the partnership can decide to accept an IRS decision that the underpayment is due from the partnership itself or it can elect to have that decision divided up among the partners, according to their percentage ownership or its liability percentage. Most advisors are telling partnerships to elect the latter process. If the partnership does not so choose, then the IRS will assess the actual partnership entity at the highest tax rate allowed- 39.6%. Of course, if the partnership can prove (to the satisfaction of the IRS) that a lower rate is appropriate, based upon the individual tax rates of the partners, then a lower rate may be allowed. (Don’t bank on the IRS doing so.) However, this underpayment will not be allowed to change the basis of each of the partner’s interests, if the partnership itself is taxed for the liability.

If the partnership pushes the audit results down to the partner level, then each partner is assessed for its portion of the tax liability at its own rate. (Many of those rates will not be at 39.6%, but much lower values.)  And, the partnership can issue an adjusted (amended) K-1 for the IRS revisions that will change the basis and avoid the double penalty possibility. The partnership has 45 days from the date of the IRS notice of change to effect this election.

There is another change that affects partnerships- the PAL (passive active loss) issue. Why? Because most partners and partnerships do not maintain pristine time records. (This also affects real estate rentals that are reported on Schedule E, page 1.) There are various definitions that set the PAL issues- for real estate professionals it is a minimum of 750 hours of work a year. The IRS has allowed other partnerships to use different designations, such as 500 hours, or the fact that a particular partner does all the work (even if less than 500 hours), or even when a partner spends 100 hours or more on the partnership and no one else does more.

But, the rules to prove how much participation actually occurs are gelling. One can use a record of cell phone call records, eMails, or credit card charges. Travel itineraries and receipts can prove how much participation was involved. Even affidavits from customers and clients can be used to prove the time one participated in the venture.

We’ll continue with Part VI tomorrow.