Small Businesses: Plan for Lower Section 179 Expense
Effective in 2014, the amount of capital purchases that can be expensed versus depreciated over time is much lower. Here are some things to consider.
Top-line: In 2014, the annual expense limit for Section 179 is now $25,000, down from $500,000 in 2013. You will need to plan accordingly.
Section 179 of the tax code allows businesses to immediately expense qualified capital purchases versus depreciating (recovering) their cost over time. Qualified purchases can be new or used equipment and certain software placed in service during the year. This benefit can be maximized as long as total qualified asset purchases by your business do not exceed $200,000 (formerly $2 million) during your 2014 tax year.
What’s the Problem?
For years the threshold for qualified purchases was much higher than the lower Section 179 amount in 2014. The old Section 179 provision allowed for small businesses to upgrade equipment while lowering their current year tax obligation. Many small businesses like dentist offices, veterinarians, chiropractors and others used this provision in the tax code to help manage their cash flows through reduced taxes while purchasing needed equipment.
Time to Plan
Users of Section 179. If your business currently uses Section 179 as a tax planning strategy, you need to review your anticipated capital purchases for the year. Consider prioritizing your needs to ensure the most important capital purchases are at the top of your list.
Delay your Purchases? There is a slight possibility that Congress will act during the year to increase the Section 179 limits once again. This retroactive nature in Congress has been in place for the past number of years, so this is not out of the question. Consider delaying purchases until later in the year if you think this might happen.
Is Section 179 for you? Please remember that taking advantage of this provision in the tax code only changes the timing of expensing your capital purchases and not the over all deduction of your purchase. If you think Congress will continue to raise taxes to help balance the budget, your future income could be exposed to a higher tax rate. By using standard recovery periods for your capital purchases (typically three, five, or seven years), you are saving some expense for later (higher tax) years. In this case using Section 179 expensing may not be the right decision for your business.
Feel free to call (813) 283-0642 for help to review your situation, especially if you are planning major capital purchases in the near future.
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.