New Limits on Business Property Expensing in 2014
For 2014, two highly favorable federal income-tax provisions for business owners have been curtailed or eliminated.
First, special 50% first-year “bonus” depreciation available before 2014 for certain qualified property is no longer available for most types of property. Second, the elective Section 179 expense deduction has been reduced from $500,000 to $25,000 a year starting this year. With these new limitations, small business owners will need to plan carefully to take advantage of the remaining Section 179 deduction.
Operation of Section 179
For qualifying property purchased and placed in service during the year, the Section 179 deduction allows a business owner to deduct up to $25,000 of the property’s cost in the first year, rather than to gradually depreciate that cost over the property’s useful life. Moreover, if the cost of the new property exceeds the $25,000 limit, Section 179 allows a carryover of unused amounts to future years.
Where the amount of the new purchases is substantial, Section 179 may require a reduction of the allowable expense. The $25,000 deduction limit is reduced dollar-for-dollar to the extent that the cost of the qualifying property exceeds $200,000.
As a result, if a business owner were to buy and place $225,000 in qualifying property in service during 2014, then the expense deduction would be completely disallowed. The taxpayer would then need to depreciate the property over its cost recovery period, according to the usual depreciation rules.
Another limitation is the taxpayer’s taxable income. The amount of the Section 179 expense deduction may not exceed the taxpayer’s taxable income from his or her active trades or businesses, taken together. However, those who earn wages may include them in the calculation of taxable income. And, for these taxpayers who are married and file a joint return, the calculation of taxable income will include the income of the spouse.
The Section 179 expense deduction may be applied, generally, to most depreciable property (other than buildings) that is acquired by purchase and placed in the service of an active trade or business. Property specifically excluded from Section 179 treatment includes air conditioning and heating units and computer software.
Additionally, qualifying property must be used more than 50% in the trade or business. In the event the property stops being used predominantly in the taxpayer’s business, the IRS may require that part or all of the Section 179 deduction be recaptured.
We Can Help
Our tax professionals are available to help businesses understand and take advantage of the tax deductions and credits available. Even where favorable tax provisions have expired or have been cut back, we can help your business find ways to save tax dollars. Contact us for further information.