Last year I wrote a post discussing the tax benefit of buying a piece of equipment by 12/31. As I predicted, the depreciation rules were not extended at the end of 2013, and taxpayers marched into 2014 with no provision for bonus depreciation and only $25,000 of Section 179 available. But, thanks to Congress' call to action with the Tax Extenders bill signed into law December 19th, these great depreciation provisions are back for 2014.
Although it might not be too late to ring the register on a new capital acquisition for 2014 if you both need and have the funds to purchase equipment or other assets, the following information can help determine the impact bonus and Section 179 depreciation will have on your tax situation for 2014.
50% Bonus Depreciation
Bonus depreciation permits a taxpayer to expense 50% of the cost of an asset in the first year, plus normal depreciation on the remaining 50%. Bonus depreciation can only be taken on assets that are new or being used in a new way in the hands of the user. Simply, a new computer is eligible for bonus, but a used delivery truck that is purchased to be used as a delivery truck is not eligible for bonus. Bonus is "automatic", meaning that in order to not take bonus on new assets you must classify the asset as "used" or elect out of bonus, which must be done by class life. Bonus cannot be limited either by income or other factors, and bonus can put the taxpayer into a loss.
Section 179
For 2014, taxpayers can elect to expense 100% of an asset in 2014 using Section 179. Taxpayer's can elect up to $500,000 of Section 179, but this amount is limited by taxable income and also by the amount of purchases eligible for Section 179 made during the year. The asset can be new or used. Section 179 cannot be utilized if the taxpayer does not have a profit, and any elected 179 that is unused is carried forward to future periods. Once a taxpayer has made $2 million worth of eligible purchases, the amount of 179 available is reduced. Unlike bonus depreciation, Section 179 is an election the taxpayer must make.
Special considerations
One of the methods above is not necessarily better than the other, because all taxpayers have different motives. But there are a few things to consider when accelerating depreciation:
- Depreciation taken now cannot be taken later. Taxpayers should consider their 2015 income and capital acquisition budget when determining how much accelerated depreciation to take in 2014.
- Cars are special, especially luxury cars, SUV's or trucks. The amounts of bonus and 179 in some cases are limited.
- Cash flow planning is essential. Utilize credit cards or short-term financing to purchase the asset before 12/31 and pay it off in January or in 2015.
- Don't purchase new equipment simply to avoid taxes. If you were planning to purchase the new equipment then do it before 12/31 to take advantage of the depreciation rules. But remember some deductions do not create a dollar-for-dollar reduction in taxes.