Tax-saving tips if you purchased business equipment in 2013
If you haven’t filed your corporate tax return for the 2013 tax year yet, you may still have an opportunity to take advantage of two tax breaks for businesses: Section 179 expensing and bonus depreciation. Section 179 expensing continues into 2014, but with greatly reduced limits; bonus depreciation ended Jan. 1, 2014. IRS Publication 946 has more information.
Helpful insights: Section 179 expensing
Section 179 expensing offers businesses an alternative to depreciating assets over time, and is available for new or used equipment. Expensing is the most accelerated form of depreciation. Your business may be able to currently deduct (expense) the cost of qualifying capital equipment. For 2013, the Section 179 expensing limit is generally $500,000, but is subject to two limitations:
- The investment (or dollar) limitation: The amount of the available expensing election is reduced dollar for dollar as annual asset purchases rise from $2 million to $2.5 million. For 2014, the expensing limit drops to $25,000 of purchases, and the phase-out begins once 2014 asset acquisitions exceed $200,000.
- The income limitation: In order to use Section 179 expensing, you have to have profits; you can’t drive yourself into a loss by using this provision. If your business is at the break-even point, you can’t use Section 179 expensing. However, you can carry forward indefinitely any allowance that is denied because of the income limitation (but not the investment limitation). You may also qualify for bonus depreciation.
For example, say in 2013, you bought and placed in service $500,000 in machinery and a $25,000 circular saw for your business. You elect to deduct $475,000 for the machinery and the entire $25,000 for the saw, a total of $500,000. This is the maximum amount you can deduct. Your $25,000 deduction for the saw completely recovered its cost. Your basis for depreciation is zero. The basis for depreciation of your machinery is $25,000. You figure this by subtracting your $475,000 section 179 deduction for the machinery from the $500,000 cost of the machinery.*
If the total of all qualifying Section 179 property you bought and placed in service in 2013 exceeded $2 million, your maximum deduction would be reduced. For example, if you bought $2.1 million worth of equipment, your total allowable deduction would be $400,000.
Helpful insights: bonus depreciation
If you acquired and placed into service in 2013 machinery, equipment and other fixed assets, your 2013 tax return represents your last opportunity to take advantage of bonus first-year depreciation, barring an act of Congress. The tax break was created in 2002 and discontinued at the end of last year. Normally, you can depreciate capital investments or equipment purchases over several years.* Bonus appreciation allows you to frontload those deductions and retain more capital.
For 2013, businesses can claim a first-year depreciation deduction equal to 50 percent of the adjusted basis (or cost) of qualified new property acquired and placed in service during the year. Bonus depreciation is only available for new property. So if you purchased a piece of used machinery, you can’t take bonus depreciation on it. However, it might qualify for Section 179 expensing.
For example, if you bought and placed in service qualified property that cost $450,000 and elected not to claim a section 179 deduction, you could deduct 50 percent of the cost ($225,000) as a special depreciation allowance for 2013. You could use the remaining $225,000 of cost to figure your regular MACRS depreciation* deduction for 2013 and later years.
Is this a big deal?
A Wall Street Journal blog post opines that the discontinuation of bonus depreciation could drag down cash flow for capital intensive companies. However, the Congressional Research Service reported in 2013 that bonus depreciation has had no more than a minor effect on business investment.
The value of these tax breaks varies by industry and by individual company. But if you qualify, you may want to claim them for 2013.**
For more information about financing equipment purchases, visit our Business Loans and Leases page or contact a CB&T Business Banker.***