Here’s a reminder for you and other business managers that, for tax years beginning in calendar year 2014 and beyond, in the absence of extending legislation, one major tax break for assets used in business scheduled to be drastically reduced. Also, for most assets placed in service in calendar year 2014 and beyond, another tax break is scheduled to be completely eliminated. Specifically, “expensing” under Code Sec. 179 (a 100% first-year write-off) is scheduled to be drastically reduced from 2013 levels, and additional enhanced first-year depreciation (bonus depreciation) is scheduled to be, for most assets, completely eliminated. As more fully discussed below, the reduction in Code Sec. 179 expensing impacts, generally, only smaller businesses, and the elimination of bonus depreciation is, generally, but not exclusively, of interest to larger businesses.
Reduction in Code Sec. 179 expensing. Code Sec. 179 expensing is available, on an elective, asset-by-asset basis, for the following types of property, whether new or used (“section 179 property”): machinery, equipment, and other tangible personal property; most publicly sold computer software; some non-building land improvements; and some limited types of building improvements and buildings (certain leasehold, retail and restaurant improvements, and restaurant buildings).
For tax years (whether calendar or fiscal) beginning in 2013, the election is available for up to $500,000 of section 179 property per year (the dollar limit). The dollar limit is reduced, dollar for dollar, to the extent that the taxpayer’s total section 179 property placed in service during the year is more than $2 million (the phaseout rule). Expensing of the limited types of building improvements and buildings described above is subject to a $250,000 limit (in addition to counting against the $500,000 per-year limit).
For tax years (whether calendar or fiscal) beginning in 2014, the above benefits are scheduled to be drastically reduced. Thus, the dollar limit would be $25,000 and the beginning-of-phaseout level would be $200,000. Additionally, the computer software and limited types of building improvements and buildings described above would no longer qualify as section 179 property.
If you are currently planning to invest in section 179 property at levels that don’t maximize the pre-2014 tax year benefits discussed above, you might consider accelerating your planned investments. Alternatively, you might decide to leave your plans unchanged. You might anticipate that section 179 deductions from the investments will offset income that in the post-2013 tax years would otherwise be taxed at rates higher than the income that would be offset 2013. Also, there might be non-tax reasons for not changing your business investment plans (including the possibility that the current level of permissible section 179 expensing will in fact be extended, making any disruption or added cost due to accelerating the investments unacceptable). I can assist you in making the planning decision.
Bonus depreciation. 50% bonus depreciation applies, subject to an election-out on a depreciation-class-by-depreciation class basis, to the following types of new (not used) property (“qualified property”): tangible property with a depreciation period of not more than 20 years (machinery, equipment, other tangible personal property, and non-building land improvements); most computer software; and certain leasehold building improvements.
Bonus depreciation results in a deduction of 50% of the cost of an item of qualified property in the placed-in-service year and depreciation, under the regular depreciation rules, for the remaining cost of the item over the item’s assigned depreciation period (beginning with the placed-in-service year). However, 50% bonus depreciation is scheduled to end for property placed in service after Dec. 31, 2013 (except that for certain property with a long production period and certain aircraft, the placed-in-service deadline is Dec. 31, 2014).
The opportunity to claim bonus depreciation should be of most interest to taxpayers who are placing into service section 179 property in excess of the dollar limits (determined after application of the phaseout rule). If you are in that situation and are currently planning to invest in qualified property at levels that don’t maximize pre-2014 bonus depreciation benefits, you might consider accelerating your planned investments-or not to do so for reasons similar to those discussed above for Code Sec. 179 expensing. Again, I’m here to assist in the planning.
Note that even if yours is a smaller business, there are certain situations in which you might claim bonus depreciation. For example, certain land improvements (most parking lots, walkways, fencing, etc.) are eligible for bonus depreciation, but not Code Sec. 179 expensing.
© 2013 Thomson Reuters/RIA. All rights reserved.
If you have questions about the tax planning discussed above or any other tax matter, please contact your Client Account Manager to schedule a meeting with our tax specialists.
Michael S. Bartholomew, CPA is the Tax Services Director for A Plus Benefits, Inc.