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Save on Capital Investments in the 2014 Tax Season

Share current LOB: SmallBusiness

Now is the time for small business owners to plan and prepare for the 2014 tax season. The good news is the “fiscal cliff” bill—signed into law January 2013—extended many 2012 deductions available to small business owners, including the Section 179 and 50 percent bonus deductions. But opportunities to save might be fleeting: These two deductions could expire or be reduced in the future.  

Whether your business’ 2013 plans include capital investments for a health care or legal practice (computer systems or other office equipment) or heavy machinery for a manufacturing or production facility, you might be able to cut down on your taxes using common deductions.

Section 179 deduction

In the past, when businesses acquired qualified equipment, the purchase price was deducted and depreciated over several years under the Modified Accelerated Cost Recovery System (MACRS). Each year, a business could deduct only a percentage of the item’s value. Section 179 allows businesses to deduct the item’s entire value in its first year of use, a move that can considerably decrease tax liability.

What does it mean for your business?

The Section 179 deduction is designed for businesses that frequently update equipment, as they can take advantage of the full deduction in a single year rather than dividing it for smaller deductions over several years. The fiscal cliff deal extended an increase in the limit up to $500,000 for 2013. This is especially useful for equipment purchased with cash.

According to the IRS, any “tangible, depreciable, personal property that is acquired by purchase for use in the active conduct of a trade or business” qualifies under Section 179. This includes leased or financed equipment, including computers, software, manufacturing equipment, office furniture and business vehicles that weigh more than 6,000 pounds.

What are the limitations?

“If you finance [the equipment or property], you'll be happy with the deduction,” says Mark Wyssbrod, a certified public accountant at the Atlanta-based firm Pro@ctive CPA. “But in year two, you still have a large cash outset with the payments but no deduction to offset it.”

If a business acquires more than $2 million worth of equipment, the limit is reduced dollar-for-dollar in excess of $2 million.

Additionally, Section 179 is a “nonrefundable” deduction, which means you cannot deduct more than your total taxable income for the year. For example, if a business invests $250,000 in equipment but earns only $100,000 in taxable income, the business is eligible for up to only $100,000 in deductions.

50 percent bonus depreciation

Bonus depreciation allows businesses to deduct an additional 50 percent of an item’s value for new equipment purchased and used in the current tax year.

What does it mean for your business?

If you hit the $500,000 limit for Section 179 but have additional qualifying equipment purchases, you can deduct up to 50 percent of the value of those additional purchases as long as your total deduction does not exceed the item’s entire value.

Unlike Section 179, bonus depreciation is not limited by your taxable income. You can apply it to previous tax years or carry it over to offset future income.

What are the limitations?

The total deduction between Section 179 and the bonus depreciation cannot exceed the item’s total value, so if you’re able to deduct an item’s total value under Section 179, bonus depreciation will not apply.

Also, only new—not used—items are eligible for bonus depreciation.

Recognize opportunities

While the Section 179 and 50 percent bonus deductions could be extended again in the future, they also could drastically decrease or disappear entirely. Some have speculated that Section 179 could revert to a $25,000 limit—a significant drop from the 2013 limit of $500,000.

“The thresholds have increased dramatically (for Section 179), and these deductions were designed to encourage purchasing new products to get more money into the economy,” says Senen Garcia, an accountant and tax attorney at SG Law Group in Miami. “As the economy improves, the government may not want to give as much money away, so you might see a lot of these items get reduced or removed.”

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.