Max out on Section 179 deduction
While legislative efforts to extend a six-figure Section 179 deduction seem to have stalled in Congress, business owners are left in a quandary. Should you buy new equipment this year if the cost puts you over the current first-year deduction limit?
Strategy: Wait to see what happens. The prospects for a Section 179 extension should appear clearer after the November midterm elections.
Here’s the whole story: Under Section 179, your business can currently deduct the cost of qualified business property placed in service up to an annual limit. For this purpose, “qualified business property” includes most types of tangible personal property, both new and used, and software.
Congress has toyed with the annual limit over the past 15 years (see box below). Going back to 2000, the maximum Section 179 deduction was only $20,000. After legislation increased the limit to $250,000 in 2008, Congress increased it again to $500,000 in 2010. Subsequently, the $500,000 maximum deduction was preserved for 2010-2013.
But the clock ran out on six-figure deductions. For tax years beginning 2014, the maximum Section 179 deduction has reverted to only $25,000.
There are two other key tax law rules that may affect your equipment-buying decisions.
1. Annual income limit: The Section 179 deduction can’t exceed the net taxable income from your business activities. For instance, if your company shows a $20,000 profit this year, your deduction would be limited to $20,000, even though the maximum allowance will be $25,000, at worst. The limit applies to the net taxable income from all your business activities.
2. Annual dollar threshold: If the total cost of property placed in service during the year exceeds an annual threshold, the maximum Section 179 deduction is reduced on a dollar-for-dollar basis. This dollar threshold has also been adjusted by legislation coordinated with the maximum Section 179 allowance. For property placed in service in tax years beginning in 2014, this threshold is only $200,000, unless it’s changed by Congress.
For example, suppose in 2014 your company places equipment in service costing $210,000. As things stand now, your Section 179 deduction would be reduced by the $10,000 excess above $200,000 to just $15,000. However, if you keep your equipment purchases below the $200,000 threshold, your company can claim the maximum $25,000 deduction (subject to the annual income limit).
Of course, to the extent that you exceed the maximum Section 179 allowance, you can still claim “regular” depreciation deductions under the Modified Accelerated Cost Recovery System (MACRS). Let’s assume that you place $35,000 of equipment in service in 2014, so you’re $10,000 above the Section 179 deduction limit. If the equipment is seven-year property, the applicable percentage for the first year under MACRS is 17.29%. This entitles you to a $1,729 deduction in addition to the $25,000 Section 179 write-off.
Tip: Congress is also debating an extension of the 50% bonus depreciation break which expired at the end of 2013.