There was a real fear that bonus depreciation might go away, and robust Section 179 expensing would be at least partially limited, but Congress has handed business owners two gifts by extending these tax breaks through December 31, 2014. Bonus depreciation and Sec. 179 expensing are two of the business tax extenders that President Barack Obama is expected to sign into law this week.
The tax extenders expired December 31, 2013, leaving business owners uncertain when it came to planning for capital purchases this year. The retroactive extension means money back for those who made purchases already this year. And in some cases it’s spurring last-minute year-end spending in anticipation of the imminent expiration of the one-year extension on Dec. 31, 2014 (got that?). There’s really less than two weeks to act.
So for 2014, 50% bonus depreciation is back and the dollar limits for Sec. 179 expensing are way back up at $500,000, with a $2.5 million investment ceiling. On Jan. 1, 2015, bonus depreciation disappears again, and Sec. 179 becomes way less powerful, reverting to a $25,000 limit with a $200,000 investment ceiling.
Under Sec. 179, small business owners can deduct the entire cost (100%) of up to $500,000 of new or used computer equipment, vehicles, furniture–most depreciable assets that have less than a 20-year life.
With 50% bonus depreciation, a company can deduct half the cost of new capital purchases in the first year. Sec. 179 allows a business to deduct the entire cost (100%) of a small capital purchase immediately, rather than writing it off over time and having to hassle with depreciation schedules. The bonus depreciation break can still be more valuable than the Sec. 179 break because the Sec. 179 deduction is limited to business taxable income with any excess carried forward. But if you’re actively involved in running a business, you can not only claim losses generated by 50% bonus depreciation against other income but can also carry any still unused losses back for two years and get a refund check from Uncle Sam.
As soon as the Senate passed the one-year extension, Boston CPA Scott Kaplowitch of Edelstein & Co. called up a commercial landscaping client who typically buys a lot of equipment but had said at a November planning meeting that he was waiting until he found out where the extenders were going. With no bonus depreciation and a $25,000 limit on Sec. 179 expensing, he wasn’t going to spend the money to buy new equipment this year. But with the higher Sec. 179 limits coming in, now they’re going to go out and take a loan and buy a dump truck and some other machinery, for a total of $100,000. “It has a huge impact on their bottom line,” Kaplowitch says.
Another client, in the construction business, had already made $3 million in equipment purchases this year. It’s an S Corp so income passes through to partner shareholders. With bonus depreciation, they’ll get a $1.5 million write-off—that means they probably won’t have to pay 4th quarter tax estimates, which helps with cash flow, and when they file their 2014 taxes, their taxable income will be significantly lower because bonus depreciation was allowed. “He wasn’t counting on it, so it’s a bonus for him—no pun intended,” Kaplowitch says.
What about purchases in the New Year? Sec. 179 will likely be renewed—or maybe even made permanent—although likely at lower dollar limits. Bonus depreciation could easily disappear for good. After all, it’s a “bonus” – but it’s been around so long now it seems like a business gimme. It was put back in the tax code in the 2007 stimulus package effective Jan. 1, 2008 (Congress upped it to a 100% write-off for property acquired and put to use after Sept. 8, 2010 through Dec. 31, 2011). And before that, from Sept. 10, 2001 to Sept. 11, 2004, there was a 30% bonus depreciation provision.
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