With the outlook on the economy looking brighter, the future of popular tax savings strategies that allowed accelerated depreciation of capital expenditures looks dim. While it’s not completely out of the realm of possibility for congress to retroactively reinstate these popular tax breaks back to their 2013 levels, the general consensus is that Bonus Depreciation won’t be available for the year 2014, and that Section 179 may or may not be increased from its current level. For businesses, these changes may represent a shift in your 2014 tax strategy and plans for expenditures and improvements.
Aimed at stimulating economic investment, bonus depreciation was originally introduced into the US Tax Code in September 2001, and has been available off and on since its introduction. Bonus depreciation allowed businesses to deduct up to half the cost of new capital expenditures and real property, with the rest of the cost depreciated over the prescribed tax life. At year end, many companies would leverage this tax savings opportunity by purchasing big ticket items such as equipment, vehicles and furniture. This provision expired at the end of 2013.
The second depreciation related change is that the asset expensing election under Section 179 will be reduced to $25,000 for 2014, which is down from $500,000 in 2013. Section 179 was a provision that allowed for the immediate write off of the cost qualifying property that would otherwise have to be capitalized and depreciated.
In order to do so, you must have taxable income and an investment limit caps how much qualifying property you can place in service in a given year before Section 179 starts to phase out. Under the current law, the investment limit has fallen to $200,000, which means Section 179 will be completely phased out if a business purchases $225,000 of qualifying property.
What does this mean to your 2014 tax strategy? First, know that it’s highly likely that capital expenditures won’t qualify for accelerated deduction in 2014. While Bonus Depreciation and Section 179 may be off the table, you may want to discuss other tax savings strategies, such as those available under the new Tangible Asset Regulations (TARS) with your CPA.
Contributed by Kevin A. Eisenhart, CPA, MBA, MST, manager in RKL’s Tax Services Group. He specializes in providing tax planning and compliance solutions for businesses and individuals, including multi-state taxation and consolidated returns. Kevin has 10 years of experience in public accounting and primarily serves companies in the construction/real estate, architectural/engineering, and manufacturing industries.