For tax years beginning in calendar year 2014, one major tax break for assets used in business is scheduled to be drastically reduced and another tax break is scheduled to be completely eliminated. Specifically, “expensing” of asset purchases 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.
Reduction in Code Sec. 179 expensing.Code Sec. 179 expensing (the deduction of the entire purchase price in the year placed in service) 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 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 phase-out 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 beginning in 2014, the above benefits are scheduled to be drastically reduced. Thus, the dollar limit would be $25,000 and the beginning-of-phase-out 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.
Bonus depreciation.50% bonus depreciation applies, subject to an election-out on a class-by-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 year placed in service and depreciation, under the regular depreciation rules, for the remaining cost of the item over the item’s assigned depreciation period. However, 50% bonus depreciation is scheduled to end for most property placed in service after December 31, 2013.
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 Section 179 dollar limits (determined after application of the phase-out rule). 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.
If you are currently planning to invest in Section 179 property or bonus depreciation property at levels that do not maximize the pre-2014 tax year benefits discussed above, you might consider accelerating your planned investments. You might anticipate that Section 179 deductions from the investments will offset post-2013 income that might otherwise be taxed at rates higher than the income that would be offset 2013. Or there might be non-tax reasons for not accelerating purchases. Planning for taxes should start now because December may be too late.
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