Section 179 expensing
The new law permanently increases the amount that small businesses can deduct all at once in any given year for acquiring certain types of property. Because Rhode Island tax law is linked to federal tax law in this regard, the higher deduction limits will apply not only for federal tax purposes, but also for Rhode Island tax purposes. Thus, if a business claims the deduction at the federal level, the business will automatically qualify for the same deduction for Rhode Island tax purposes.
The deduction involves Section 179 of the Internal Revenue Code and is known as the "Section 179 deduction." In general, it applies to “qualifying property” – which means depreciable tangible personal property that is purchased for use in the active conduct of a trade or business. “Qualifying property” also includes off-the-shelf computer software and qualified real property.
The new federal law raises, to $500,000 from $25,000, the annual Section 179 expensing limit permanently -- for tax years beginning after December 31, 2014. The $500,000 limit applies for both federal and Rhode Island tax purposes. The phase-out limit, which was $200,000, is now $2 million for tax years beginning after December 31, 2014, for federal and Rhode Island tax purposes.
The federal deduction for qualified tuition and related expenses for higher education, under Internal Revenue Code section 222, is extended through 2016. (It had expired for taxable years beginning after December 31, 2014.) If someone qualifies for the deduction at the federal level, it will reduce that person’s federal adjusted gross income – and will automatically reduce the amount of income taxed by Rhode Island, thus saving that person federal and Rhode Island taxes. The maximum federal deduction is $4,000. Income limits apply.
Educator expense deduction
A federal deduction of up to $250 for certain expenses of elementary and secondary schoolteachers, under Internal Revenue Code section 62, was available for taxable years beginning prior to January 1, 2015. Under the new law, the provision is permanently extended. In general, the deduction is for books, supplies, computer equipment (including related software and services) and other equipment, and supplementary materials used by the eligible educator in the classroom. If someone qualifies for the deduction at the federal level, it will reduce that person’s federal adjusted gross income – and will automatically reduce the amount of that person’s income taxed by Rhode Island, thus saving that person in federal and Rhode Island taxes. Starting in 2016, the $250 cap will be indexed to inflation. Also, professional development expenses will be considered as eligible expenses for purposes of the deduction.
Businesses and individuals may wish to consult their tax advisors to review the new federal tax law to see how it applies to them, and the impact on their Rhode Island taxes. For more details, click here.