The bonus depreciation and Section 179 tax code provisions allow small businesses to expense large capital purchases. Is this better than depreciating the purchase over time? Here are some thoughts on the matter.
As a reminder, businesses may accelerate the expensing of qualified capital purchases. This can be done within two special provisions in the tax code.
The American Taxpayer Relief Act of 2012 extends the annual $500,000 amount of qualified assets that may be expensed (instead of depreciated) for 2013. This benefit can be maximized as long as total assets purchased by your firm does not exceed $2 million. Qualified purchases can be new or used equipment and qualified software placed in service during the year.
The recent tax law also extends an additional first-year bonus depreciation of 50% of the cost of qualified property. To qualify the property must be purchased and placed in service after 1/31/2012 and before 1/1/2014. For property to qualify it must be “original use” property. This typically means new property. Not interested in accelerating your depreciation expense? Then you may choose to opt out of this provision for each category (class) of property you place in service.
What should you do?
So is taking advantage of these provisions good for your business? Not always.
Remember if you use these special asset “expensing” provisions, depreciation expense taken this year is given up in future years. This is especially important to plan for if your company is organized as a “flow through” entity like an S-Corporation as more income could be exposed to higher marginal tax brackets in a number of future years. How many future years? It depends on the recovery period of the asset, but the additional tax exposure could be from two to six years!
More importantly, if you think Congress will increase tax rates to help balance the budget, your future income may be exposed to a higher tax rate than your current income.
If you have some predictability in your business, it probably makes sense to forecast your projected pre-tax earnings with and without the accelerated depreciation to ensure you are making the right tax decision over the long-term.