If you’re planning on purchasing equipment and deducting the cost from your tax liability, make sure you double check your tax planning strategy. For tax years beginning in calendar year 2014, two popular business tax incentives have been drastically changed Section 179 and Bonus Depreciation.
Section 179 allows for immediate expensing of certain fixed asset purchases. Fixed assets that qualify for this tax incentive include both new and used personal property such as machinery, furniture, computers, and most publicly sold computer software. Under the old rules, companies could take a maximum deduction of $500,000, but starting in tax year 2014 companies can only take a maximum deduction of $25,000.
Companies that make qualified purchases in excess of $200,000 will see reduced availability of this business tax incentive and companies with more than $225,000 of fixed asset purchases will no longer qualify.
Bonus depreciation on the other hand, allowed for immediate expensing of 50 percent of the purchase price of personal property and then regular depreciation on the remaining cost basis. This tax incentive expired on December 31, 2013.
For both of these tax incentives, business owners need to realize that depreciation expense is based on the purchase price of an asset acquired and the total deductions available are equal to the cost. If you utilized Section 179 immediate expensing or bonus depreciation you are (or were) accelerating the deductions but will still only generate deductions up to the cost of the asset. An accelerated expense lowers your current tax bill and generates additional after tax funds available to grow your business or compensate the employee group or ownership.
The Internal Revenue Service has implemented new Repair Regulations that redefine how taxpayers need to review expenditures to determine if the amount can be expensed as a repair or is required to be capitalized and depreciated. These new regulations will require taxpayers to capitalize more items at the same time the business incentives discussed above have been modified or eliminated.
With the ending of bonus depreciation and the large reduction in the amount of Section 179 depreciation deductions available, businesses owners should be prepared to pay higher taxes. Another option is to contact your elected officials and lobby for the reauthorization of either or both of these tax incentives vital to business owners.