The Section 179 Tax Deduction Deadline Is Closing In

With the end of the year only about a month and a half away, time is running out to secure your Section 179 equipment deduction.

Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment purchased or financed during the tax year. That means that if you buy or lease a piece of qualifying equipment, you can deduct the full price along with the normal years’ depreciation, from your gross income.  This tax incentive was created by the U.S. government in an effort to encourage businesses to buy equipment and invest in themselves. Continue reading “The Section 179 Tax Deduction Deadline Is Closing In”

House Approves Permanent Section 179 Depreciation Extension for 2015

The House of Representatives in February approved with a 272-142 vote permanent extension of higher expensing levels for Section 179, a provision that allows small businesses to write off capital purchases immediately. The measure was passed out of House Committee last week. The bill now moves to the Senate.

The measure makes higher Section 179 expensing levels experienced through the 2010-2014 tax years permanent. This would allow small business owners to deduct up to $500,000 in qualifying expenses with a phase-out threshold of $2 million. A 50% bonus depreciation for the purchase of new capital assets and equipment also is included in the measure. If the Senate does not agree to the House’s extension option or a variant thereof, the deduction level will remain standing for the 2015 tax year at $25,000. Last year, lawmakers in December debated extending higher expensing levels under the measure, arriving at a one-year extension for the 2014 tax year. That left businesses little time to make purchases before the Dec. 31 deadline for tax year 2014. The House’s latest approval, however, faces an uncertain future in the Senate, where a shorter extension period was favored last year. Full tax reform in lieu of extenders may also be considered.

Senate Approves House-Passed Tax Extenders Bill

The Senate approved by a 76-16 vote the House-passed tax extenders bill (H.R. 5771) to extend most of the tax provisions that expired in 2013 retroactively for one year, through the end of 2014. The Senate’s action sends the extenders bill to the President for his signature. He is expected to sign the bill, and early press reports indicate that he is expected to sign the bill this week.

The bill’s business provisions include, amongst other provisions, extensions of: Bonus Depreciation; Section 179 (The provision would extend the small business expensing limitation and phase-out amounts in effect from 2010 to 2013 ($500,000 and $2 million) to property placed in service during 2014); R&D credit; Controlled Foreign Corporation look-through rule; and Active Financing Exception under Subpart F. The extenders bill also includes multiemployer pension plan provisions and a tax technical corrections package.

Section 179 Update for 2014

There’s a lot of information out there about Section 179, but the most important thing to know is that it exists to help you. It was created as part of several economic stimulus bills to encourage businesses to invest in capital equipment.

What is Section 179?

Section 179 is part of the Internal Revenue’s Tax code, and it allows businesses to deduct the full purchase price of qualifying equipment purchased or financed during the tax year (subject to limitations). That means if you buy or lease a piece of qualifying equipment, you can deduct the full purchase price from your gross income.

But how does it work, exactly?

When a business buys or leases certain types of equipment, it typically gets to write them off a little at a time through depreciation. Section 179 allows businesses to write off the entire purchase price the year they buy it (subject to limitations). This encourages businesses to buy or lease as much equipment as possible until they reach the limit on equipment purchases.

There’s a limit?

An equipment purchaser or lessee can deduct up to $25,000 from their tax burden. After $25,000, a bonus depreciation rate of 50 percent kicks in, and there is a $200,000 cap on the Section 179 deduction. After that, the deduction available begins to be reduced.

Can you clarify that?

If a company purchases or leases equipment for $25,000 it is allowed to write off that purchase in the first year. At an assumed 35 percent tax bracket, the Section 179 deduction would save the company $8,750. You can find a Section 179 savings calculator by visiting http://www.section179.org/section_179_calculator.html

What equipment qualifies for a Section 179 Deduction?

Most equipment that businesses purchase or lease will qualify for the deduction including “off-the-shelf” software. Here are some of the types of equipment that qualify:

  • Equipment (machines, etc) purchased for business use
  • Tangible personal property used in business
  • Business Vehicles with a gross vehicle weight in excess of 6,000 pounds
  • Computers
  • Computer “Off-the-Shelf” Software
  • Office Furniture
  • Office Equipment
  • Property attached to your building that is not a structural component of the building (i.e.: a printing press, large manufacturing tools, etc.)
  • Partial Business Use (equipment that is purchased for business use and personal use:

Generally, your deduction will be based on the percentage of time you use the equipment for business purposes.

Can I buy or lease multiple pieces of equipment under Section 179?

Yes. Section 179 was created to stimulate this kind of investment. However, there is a cap on purchases. The amount of equipment purchased or leased cannot exceed $200,000. For purchases over $200,000, the deduction is reduced, but a first year bonus depreciation kicks in at a rate of 50 percent.

Does the purchase date impact the deduction?

Yes. The Section 179 deduction only applies to equipment purchased in that tax year. To receive the deduction in 2014 you must purchase or lease equipment from Jan. 1, 2014 and Dec. 31, 2014.

What else do I need to know?

Make sure you have a conversation with your tax preparer, and he or she will need to fill out part one of IRS form 4562. That’s it.

Section 179 Depreciation Benefits Set To Expire December 31, 2013

If you are planning to purchase or lease equipment in the next few months, or early in 2014, perhaps you should consider doing it prior to December 31 to be able to get the benefit of section 179 of the IRS tax code.

Section 179 allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. In other words, if a business buys or leases qualifying equipment, they can deduct the full purchase price from their gross income for that year. It’s an incentive created by the U.S. government to encourage businesses to buy equipment and invest in themselves. It has been in existence since 2008, but may be short lived.

Section 179 is one of the few incentives included in any of the recent Stimulus Bills that actually helps small businesses and gives them the much needed tax relief. The idea is to get the economy moving ahead by motivating business to add equipment now instead of waiting another year or two.

For a business adding equipment, software, and/or vehicles totaling less than $500,000 in 2013, the entire cost can be written-off on the 2013 tax return. Other restrictions apply when equipment purchases exceed $2,000,000.

Next year is up in the air as to what changes we can expect in 2014 relative to tax incentives (or lack thereof), and accounting changes, that we will need to plan for and adjust to. Congress may extend these benefits in 2014, and we think it is likely to do so, but for now these benefits expire on December 31, 2013.

The Fiscal Cliff Deal Saves Bonus Depreciation

In addition to saving the Section 179 deduction, Congress also surprised many by extending the “Bonus Depreciation” allowance on qualified new equipment through 2013 for businesses. Under the Fiscal Cliff Deal, businesses can write off one half of the cost of qualifying new equipment in a single tax year.

Bonus Depreciation was extended back in 2010 to assist businesses recovering from the Recession. In 2011, businesses could depreciate up to 100% of qualifying new equipment which then dropped to 50% in 2012. The deduction was set to expire at the end of 2012.

Eric Savitz reported for Forbes in “How the Fiscal Cliff Deal Boosts the Tech Sector” that Bill Whyman, ISI Group technology analyst, wrote in a brief research note, “We believe the major impact will be improved business confidence, leading to greater willingness of business to invest their record cash hordes. Both these measures also improve cash flow, and on the margin have a positive impact on spending.”

The tech sector isn’t the only sector pleased with the extension of bonus depreciation. Speaking of the passage of bonus depreciation, Dave Thompson, president of TEC Equipment Inc, told Transport Topics, that “not everybody was prepared to buy and now they might. That depreciation will be a bonus; 100% is better, but 50% is pretty nice.”

According to the IRS publication, “Bonus Depreciation and Increased Section 179 Deduction under the American Recovery and Reinvestment Act”

The bonus depreciation provision generally enables businesses to deduct half the cost of qualifying property in the year it is placed in service. You may be able to take an additional first year special depreciation allowance for certain qualifying property (defined below). The allowance is an additional deduction of 50 percent of the property’s depreciable basis (after any section 179 deduction and before figuring your regular depreciation deduction).

Property that qualifies for this special depreciation allowance includes the following.

  • Tangible property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less
  • Water utility property
  • Off-the-shelf computer software
  • Qualified leasehold improvement property

Fiscal Cliff Deal Enhances Section 179 Aiding Small Businesses

Now that the dust has settled from the Fiscal Cliff Deal, small business owners may be the real winners from the months’ long hand wringing and stalled debt ceiling negotiations.

As part of the U.S. American Taxpayer Relief Act approved by Congress on January 2, 2013, the New York Times reported that businesses can continue to “fully expense many items in just one year, instead of over five years or more. The amount of investment eligible for immediate expensing grew to $500,000 in 2010 and 2011, but was to fall to $139,000 in 2012 and $25,000 in 2013. The new law extends the $500,000 limit through 2013, and pushes the $24,000 cap to 2014. Section 179 is available only to companies with total capital expenditures for the year under a certain threshold – $2 million through 2013 and $200,000 starting in 2014.”

Section 179 of the IRS Code was enacted to help small businesses take a depreciation deduction for capital expenditures in one year, rather than depreciating them over a longer period of time. By taking the full deduction for the cost of the asset immediately, rather than being required to spread out the deduction over the asset’s useful life, businesses can realize a substantial tax savings.

What Kind of Equipment Does Section 179 Apply To?

Small businesses may deduct the cost of certain new and used equipment including tangible personal property. According to the IRS  to qualify for the section 179 deduction, your property must be one of the following types of depreciable property:

1. Tangible personal property.
2. Other tangible property (except buildings and their structural components) used as:

  • An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services,
  • A research facility used in connection with any of the activities in (a) above, or
  • A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities

3. Single purpose agricultural (livestock) or horticultural structures. See chapter 7 of Publication 225 for definitions and information regarding the use requirements that apply to these structures.

4.Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum.

5. Off-the-shelf computer software.

Furthermore, the IRS publication “ Bonus Depreciation and Increased Section 179 Deduction under the American Recovery and Reinvestment Act” also states:

 To qualify for the section 179 deduction, your property must have been acquired for use in your trade or business. Property you acquire only for the production of income, such as investment property, rental property (if renting property is not your trade or business), and property that produces royalties, does not qualify.

8 Things to Know about the Fiscal Cliff Deal and Your Pocketbook

Amid great fanfare, the House of Representatives passed the Senate deal negotiated by Vice President Joe Biden and Senate Minority Leader Mitch McConnell late in the evening on New Year’s Day, thereby averting major tax hikes for most U.S. households. Here are eight things to know about the deal and how it will affect your pocketbook.

  1. Your taxes are going up. Although the approved deal raises tax rates only on individuals with income over $400,000 and families with income over $450,000 (their top tax rates will increase to 39.6%, up from 35% in 2012), the deal did not save the Payroll Tax Holiday. Therefore, the payroll tax immediately rises back to its 2010 level resulting in a rate that increases from 4.2% in 2012 to a new rate of 6.2%. The Tax Policy Center reports that the “average federal effective tax rate will be 21.7 percent and the average increase is $1,257.”
  2. Millions of taxpayers will be spared from the Alternative Minimum Tax. Time Magazine reports, “According to one GOP estimate, 28 million families would have had to pay an average of $3,400 in extra taxes this year without the AMT fix. About four million taxpayers owed the AMT in 2011, up from about 1.3 million in 2001, according to the Tax Policy Center.”
  3. Phase-out of personal and dependent exemption deductions for married taxpayers with an AGI of $300,000 or more and single taxpayers with an AGI of $250,000.
  4. Phase-out of itemized deductions if your AGI exceeds $250,000 for single taxpayers and $300,000 for married joint-filing taxpayers.
  5. The American Opportunity Tax Credit, the Child Tax Credit and the Earned Income Tax Credit all survived and will be on the books for the next five years.
  6. Section 179 has been increased retroactively for 2012 and 2013. With the new deal in place, Section 179 has been increased retroactively for 2012 from $139,000 back to $500,000. The new law extends the $500,000 limit through 2013, and pushes the $25,000 cap to 2014. Section 179 is available only to companies with total capital expenditures for the year under a certain threshold — $2 million through 2013 and $200,000 starting in 2014.
  7. 50 percent bonus depreciation for capital expenditures has been extended through 2013.
  8. The Research and Development Tax Credit has been renewed retroactively for 2012 and “prospectively for 2013.”

Tax Tips for the End of 2012

With just days left of 2012, there are still some tax strategies you and your business can put in place to make sure you don’t over pay your tax bill. Here are our favorite tips so you won’t become one of the statistics.

Section 179 Deduction. If you acquired assets for your business in 2012, you may be able to deduct up to $139,000 of the cost of qualifying new and used business equipment placed in service in 2012.The Section 179 deduction is scheduled to drop significantly to just $25,000 in 2013 unless Congress intervenes. In 2011, the deduction was $500,000 of qualifying new and used assets.  Keep in mind, your business must turn a profit in 2012 in order to take advantage of the deduction. You can read more about our Section 179 advice here.

Reinvested Dividends. Although this isn’t a deduction or tax credit, according to Kiplinger this is an “important subtraction that can save you a bundle.” If your mutual fund dividends are automatically used to buy extra shares, your tax basis in the fund is increased with each new reinvestment. Kiplinger advises that investors be careful not to forget including the reinvested dividends in your tax basis—failing to do so may result in double taxation of the dividends.

American Opportunity Credit. If you have a child in college then make sure you understand whether the American Opportunity Credit applies to you. Under the credit, taxpayers can get a reduction in their tax bill of up to $2500 per student provided the tax filers have an adjusted gross incomes of less than $80,000 a year (if single) or $160,000 (if they file jointly). An eligible family with two kids in college could get a tax credit of $5,000. Best part about the credit is that it covers all four years of college. In order to get the credit, you will need to fill out IRS form 8863.The tax credit is set to expire at the end of 2012.

Student Loan Interest.  If you are paying back your child’s student loan, and your child is no longer a dependent, your child is eligible to deduct up to $2500 of student loan interest you paid. However, parents can’t claim the interest deduction since they are not liable for the student loan debt.

Medicare Premiums for Self Employed. If you own your own business and are qualified for Medicare, you can deduct the premiums for Medicare Part B and Medicare Part D as well as supplemental Medicare (medigap) policies. According to Kiplinger, “you can’t claim this deduction if you are eligible to be covered under an employer-subsidized health plan offered by your employer.”

Retirement Accounts. Taxpayers have till April 15, 2013 to set up a new IRA or add to an existing IRA and have it count for your 2012 tax return.

Small Business Health Care Tax Credit. Small businesses that pay at least half of your employees’ health insurance premiums may be eligible for a tax credit of up to 35 percent of the premiums paid. You can find more information at the IRS web site.

Storm Damage Tax Breaks. If you sustained property damage this year from natural disasters such as hurricanes, floods, blizzards, tornadoes and earthquakes, your losses may be deductible if they are not reimbursed by insurance reports Joy Taylor for Kiplinger. However, to claim the deduction, if your property is insured you must file a claim before taking the deduction. Kiplinger created a calculator to help figure out your storm damage deduction.

Baggage Fees. Did you travel on business in 2012? If you are self-employed you may be able to deduct these fees. Make sure to track these fees and add them to your deductible travel expenses.

Home Energy-Saving Credit. This credit is still available contrary to what many taxpayers may think. While it is true you can no longer get a credit for windows, doors, air conditioning, and insulation, you still can get a 30% refund of the cost of “installing qualified residential energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines” reports Kevin McCormally for Kiplinger.

 

Your Business and the Section 179 Deduction

The upcoming Fiscal Cliff and all of the impending tax changes that will occur if Congress and President Obama don’t come up with a compromise are certainly grabbing the majority of the headlines. Recently, Mike Lockwood, the president of TEQlease Capital, wrote a post “What the Fiscal Cliff Means for Section 179” and we also issued a news release “Five Things Businesses Need to Know About Section 179 and the Fiscal Cliff”.

Essentially, in both his post and in the TEQlease news release, Lockwood argues that “It never makes sense to base important decisions such as a business expansion or the acquisition of new equipment exclusively on tax incentives. Instead we recommend businesses weigh anticipated efficiencies, whether competitors have gained an advantage with newer equipment, and the availability of equipment with added capabilities as factors which are drivers for acquiring equipment.”

Lockwood recommends that businesses consider the following before making any year end equipment decisions.

  • History. In both 2008 and 2010 businesses had to wait to see if Congress would extend 179 deduction benefits and in both instances Congress did. However, Congress extended the 2010 deductions in 2011, not by the end of the year. The effect of the law was made retroactive to 2010. Most likely it will be unknown in 2012 what the law changes will be, if any; and the outcome will not be clear until sometime in 2013. Although there is uncertainty as to what Congress will do and when, by contrast today businesses do know what can be depreciated and deducted in 2012 and can act accordingly now.
  • Math. Before making a decision on any equipment or plant acquisition, businesses need to make sure they understand the economics. Meet with your tax advisor now and determine whether deferring a purchase may have an adverse tax impact. Run separate tax scenarios with your advisor including one scenario based on 2012 deduction amounts, a second based on the 2013 deduction amount and a third with pre-Bush Section 179 depreciation allowances.
  • Credit. Make sure your business credit is in good shape before deciding on leasing or financing any equipment. In order to secure the best terms, you need to demonstrate your business has a positive cash flow, manageable debt load, positive payment history, and management can demonstrate sound business judgment. If your business credit is not in good shape, now is probably not the time to finance or lease equipment regardless of the deduction.
  • Timing. In order to take advantage of the Section 179 deduction in 2012, businesses must have the equipment in place and operational by December 31, 2012. One day later and you may revert to the maximum $25,000 deduction for 2013.
  • Indecision. This can be the death knell for many businesses. Businesses that are stuck in a holding position while they wait for Congress may be missing important opportunities.

You can read the entire press release here.