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.

The post Fiscal Cliff Deal Enhances Section 179 Aiding Small Businesses appeared first on TEQlease Capital.

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.

The post Your Business and the Section 179 Deduction appeared first on TEQlease Capital.

Uncertainty regarding what will be the upcoming changes in Section 179 depreciation deductions, and in bonus depreciation changes, is actually the norm.  In both 2008 and 2010, businesses waited to find out what changes were to be made to these provisions, and much was also written then about the uncertainty surrounding the tax changes.  However, every time, the business depreciation deductions were maintained or improved.  So the impending changes now referred to as a “tax cliff”, at least with respect to business depreciation deductions, is rather ho-hum.

Yes there is uncertainty and planning is difficult, but businesses shouldn’t be stuck in a holding pattern.  There is certainty as to what can be depreciated and deducted in 2012, so businesses can act accordingly.  The overwhelming fear is that the tax environment for small businesses will worsen.  And if the past is again a good indicator, changes in tax policy toward business investment in later years won’t be known for quite some time.  This makes business investment in plant and equipment in 2012 all the more attractive.

The rules for 2012 are quite favorable.  Section 179 of the United States Internal Revenue Code (26 U.S.C. § 179), allows a taxpayer to elect to deduct the cost of certain types of property on their income taxes as an expense, rather than requiring the cost of the property to be capitalized and depreciated. This property is generally limited to tangible, depreciable, personal property which is acquired by purchase or lease for use in the active conduct of a trade or business.  The 179 election may be made only for the year the equipment is placed in use and is waived if not taken for that year.

Both the ‘Tax Relief Act of 2010’ as well as the ‘Jobs Act of 2010’ that passed in late 2010 affected Section 179 in a positive way for this 2012 tax year.  Here are the highlights for the 2012 tax year:

•             The Section 179 deduction limit after adjustment for inflation increased to $139,000.

•             The Section 179 threshold for total of equipment and software that can be purchased increased to $560,000.

•             The law allows 50% “Bonus Depreciation” on qualified assets placed in service during 2012.

•             The Section 179 deduction is available for most new and used capital equipment, and also includes certain software.

•             Bonus Depreciation can be taken on new equipment only (no used equipment, no software).

•             When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation – unless the business has no taxable profit in 2012.

No action in determining business depreciation deductions is expected before the elections.  Regardless the result of the election, we view it as extremely unlikely that business depreciation deductions for 2013 and beyond won’t be provided at levels intended to stimulate the economy through business – and especially small business – investment in plant and equipment.  For those seeking more certainty, investing now is the most prudent solution.

The post What the Fiscal Cliff Means for Section 179 appeared first on TEQlease Capital.