There has been a tremendous amount of hand-wringing and complaining about the “fiscal cliff” or “tax cliff”, and in particular how it will affect small business depreciation deductions. As reported in a Washington Post article by J.D. Harrison small business owners and their advisors are “anxiously waiting to see whether Congress can avoid potentially catastrophic spending cuts and tax code revisions scheduled to take place at the end of the year.” While we agree that predictability in making capital equipment expenditure decisions is important, waiting for Congress to act to determine business depreciation deductions is nothing new. In fact, it happens every few years.
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.