Section 179

Favorable Rules on Deducting Equipment Have Been Extended

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DepreciationDemocrats and Republicans in both the Senate and House of Representatives reached an agreement very early on December 16 to extend various beneficial tax provisions that expired at the end of 2014. The new law is named the Protecting Americans from Tax Hikes (PATH) Act of 2015.

While these tax provisions affect both individuals and businesses, this post will focus on the tax provisions affecting business depreciation. These provisions are very valuable for businesses that purchase long lived assets.

The $500,000 First Year Expensing Election is Now Permanent

The Act retroactively extends and makes permanent the $500,000 expensing limitation and $2 million phase-out amounts. Businesses can immediately deduct up to $500,000 of qualifying assets in the year of purchase. The $500,000 limit is reduced dollar-for-dollar for total qualifying asset purchases over $2 million. Both the $500,000 and $2 million limits are now indexed for inflation. For property placed in service after 2015, Section 179 will also apply to air conditioning and heating units.

Under pre-Act law, the maximum expensing limit dropped to $25,000 and the investment ceiling dropped to $200,000.

The Section 179 benefit is enhanced by the new provision that allows immediate deductions for small asset purchases. Under this provision, taxpayers can immediately deduct amounts paid to acquire or produce a unit of property, or acquire a material or supply if the amount doesn’t exceed $2,500 per invoice (or per item as substantiated by the invoice).

Example: Engineering Co purchases 50 computers at $2,000 each. It also purchased $500,000 of large equipment. Under prior law, Engineering Co could either depreciate the total $100,000 purchase price over five years or it could use $100,000 of its Section 179 limit to immediately deduct the purchase price. If it used Section 179 for the computers, it could use the remaining $400,000 of Section 179 to deduct part of the equipment purchase. The remaining $100,000 equipment purchase would have to be depreciated. With the new provision for small asset purchases, Engineering Co can immediately deduct the $100,000 purchase price since the per unit cost is under $2,500. Engineering Co can take this deduction without having to use any of its Section 179 deduction limit. It can now deduct the full $500,000 large equipment purchase through Section 179.

15 Year Write Off for Qualified Leasehold and Retail Improvement and Restaurant Property Made Permanent

Generally, leasehold improvements are depreciated over 39 years regardless of the term of the lease. In 2014, businesses were able to deduct over 15 years leasehold improvements that met certain qualifications. The new Act now permanently extends the favorable 15 year depreciation period for qualifying leasehold improvements property, qualified restaurant property, and qualified retail improvement property.

Bonus Depreciation Extended Through 2019

Under pre-Act law, businesses were able to immediately deduct 50% of the cost of qualified property. Generally, qualifying property was new (not used) property with a depreciable period of 20 years or less.

The new Act retroactively extends 50% first year bonus depreciation for a few years but gradually reduces it. Bonus depreciation will decrease until it reaches 30% in 2019.

Beginning in 2016, bonus depreciation will also apply to any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date the building was first placed in service (basically, improvements to an existing, not brand new, building)

To see how this applies to you, give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

 

Business Tax Benefits Extended for 2014 Tax Returns

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In a prior post, I listed some of the beneficial tax provisions affecting individual taxpayers.  This post lists some of the most popular tax extensions for businesses.

First Year Expensing of Business Asset Purchases

Section 179 allows businesses to deduct up to $500,000 of qualifying asset purchases in the year the asset is placed into service.  If this law had not been extended, first year expensing would have been limited to only $25,000.

50% Bonus Depreciation

Normally, when you buy long lived property, you can’t deduct the full cost of the property in the year you purchase it.  The purchase price is deducted over the expected life of the property.  Bonus depreciation allows 50% of the cost of qualifying property to be deducted in the year the asset is placed into service.

Accelerated Depreciation of Qualified Leasehold, Restaurant, and Retail Property

In 2010, Congress passed a law that allowed a $250,000 Section 179 deduction on qualifying real property.  The law allowed Section 179 deductions on real property placed in service during 2010 and 2011.  The law has been extended through 2014.

Research & Development Tax Credit

This is a general business tax credit for companies that incur R&D expenses in the U.S.  This credit has repeatedly been extended since its original passage in 1981.

The Work Opportunity Tax Credit

The Work Opportunity Tax Credit is available for a portion of first-year wages paid to certain qualifying employees who begin work during 2013 (now extended through 2014).  The credit is available for employers who hire members of the following targeted groups:

  • Veterans
  • Ex-felons
  • Long term family assistance recipients
  • Vocational rehabilitation referrals
  • Summer youth employees
  • Nutrition assistance recipients
  • Social security income recipients
  • Designated community residents
  • Qualified IV-A recipients

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

 

Extended-First Year Expensing of Real Property Improvements

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In 2010, Congress passed a law that allowed a $250,000 Section 179 deduction on qualifying real property.  The law allowed Section 179 deductions on real property placed in service during 2010 and 2011.  The law expired on December 31, 2011; however, as part of the Taxpayer Relief Act of 2012 passed a couple weeks ago, the law has been reinstated for 2012 and is extended through 2013.

The qualified real property must be used in the active conduct of a trade or business, and can’t be certain ineligible property (e.g., used for lodging, used outside the U.S., used by governmental units, foreign persons or entities, or certain tax exempt organizations).

There are three types of qualifying real property:

  • Qualified leasehold improvement property
  • Qualified restaurant property
  • Qualified retail improvement property

Qualified Leasehold Improvement Property

Qualified leasehold improvement property means any improvement to an interior portion of a nonresidential building if

  • such improvement is made pursuant to a lease by the lessee, sublessee, or lessor of such improved portion
  • such portion is to be occupied exclusively by the lessee or sublessee
  • such improvement is placed in service more than 3 years after the date the building was first placed in service

Qualified leasehold improvement property does NOT include:

  • an enlargement of a building
  • any elevator or escalator
  • any structural component benefiting a common area
  • the internal structural framework of the building

A lease between related persons (e.g., a lease between a taxpayer and his 80% owned business) does not qualify.

Qualified Restaurant Property

Qualified restaurant property includes:

  • a building, or
  • improvements to a building,

if more than 50% of the building’s square footage is devoted to the preparation of, and seating for on-premises consumption of, prepared meals.  Qualified restaurant property is the only category where Section 179 expense is allowed on the building itself, rather than solely on the improvements.

Qualified Retail Improvement Property

Qualified retail improvement property means any improvement to an interior portion of a building which is nonresidential real property if:

  • such portion is open to the general public and is used in the retail trade or business of selling tangible personal property to the general public, and
  • such improvement is placed in service more than 3 years after the date the building was first placed in service.

Qualified retail improvement property does NOT include:

  • an enlargement of a building
  • any elevator or escalator
  • any structural component benefiting a common area
  • the internal structural framework of the building

The Taxable Income Limitation

The amount of Section 179 expense is limited to the business’ taxable income for the year.  Any disallowed Section 179 expense is carried forward.

Example:  ABC Corp incurs $200,000 in qualified restaurant improvement expenses.  Before taking in account the $200,000 Section 179 expense, ABC Corp has $150,000 of taxable income.  ABC Corp’s allowable Section 179 expense is limited to its taxable income of $150,000.  The remaining $50,000 of Section 179 expense is carried forward to the next year.  If ABC Corp has at least $50,000 of taxable income in 2013 it can deduct the remaining $50,000 in 2013.

Disallowed Section 179 expense for real estate cannot be carried forward past 2013.  Any Section 179 expense carryforward that cannot be used in 2013 will be treated as property placed in service at the beginning of 2013.

Example:  Same as Example 1 except that ABC Corp has $0 taxable income in 2013.  The Section 179 expense of $50,000 will not carryforward into 2014, but will be treated as property placed in service on January 1, 2013 that will be expensed over its useful life (15 to 39 years depending on the type of property).

Example 2:  XYZ Corp incurs $200,000 of qualified retail improvement property in 2013.  XYZ Corp has $80,000 of taxable income before the Section 179 expense.  XYZ Corp can deduct $80,000 of Section 179 expense in 2013.  The remaining $120,000 of qualifying retail improvement property will not carryfoward into 2014, but is treated as being placed in service on January 1, 2013 and will be expensed over its useful life (15 years).

Section 179 expense on tangible personal property can still be carried forward indefinitely.

Section 179 Expense for Real Property Reduces Section 179 Expense Available for Tangible Personal Property

Prior to the Taxpayer Relief Act of 2012, the Section 179 limit for 2012 was $139,000.  The Section 179 limit had been $500,000 in 2011.  The Act reinstated the higher $500,000 Section 179 limit for 2012 and extended it through 2013.

It is important to note that the $500,000 expense available for tangible personal property is reduced by Section 179 expense used for real estate improvements.

Example:  John buys $600,000 of business equipment and spends $300,000 on qualified leasehold improvements.  If John uses $250,000 of Section 179 expense on the leasehold improvements, he may use $250,000 of Section 179 expense on the equipment.  Alternatively, for example, John could use $200,000 of Section 179 expense on the leasehold improvements, and the remaining $300,000 of Section 179 expense on the equipment.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230

Depreciation Limits on Heavy SUVs

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Since 2003, the Section 179 deduction has exceeded $100,000.  For a brief period of time, business owners could purchase SUVs with a gross vehicle weight rating over 6,000 pounds and write off the full purchase price via the Section 179 deduction.

Example:  It is 2003 and Andy buys a $60,000 Cadillac Escapade that he uses 100% for business.  Since this vehicle’s gross weight rating was over 6,000 pounds, Andy could take a full $60,000 Section 179 deduction for the purchase price of the vehicle.

The party ended on October 22, 2004.  After this date, the Section 179 deduction is limited to $25,000 for SUVs with a gross weight rating between 6,001 and 14,000 pounds.

Example:  It is 2005 and Barney buys a $60,000 Cadillac Escapade that he uses 100% for business.  Since the vehicle’s gross weight rating is between 6,001 and 14,000 pounds, the Section 179 deduction is limited to $25,000.  Barney may then claim regular depreciation on the remaining $35,000 purchase price of the Escapade (which will be deducted over the 5 year life of the vehicle).

Depreciation per Year is as Follows:

                Section 179         Regular Depreciation

2005       $25,000                $7,000

2006                                  $11,200

2007                                  $6,720

2008                                  $5,040

2009                                  $5,040

 

The heavy SUV rule applies to Section 179 expense, it does not limit the amount a taxpayer can deduct through bonus depreciation.  Therefore, the heavy SUV rule will not affect the amount a taxpayer can deduct through 50% bonus depreciation for 2012.

Example:  It is 2012 and Opie buys a $60,000 Cadillac Escapade that he uses 100% for business.  Since the vehicle’s gross weight rating is between 6,001 and 14,000 pounds, the Section 179 deduction is limited to $25,000.  However, Opie may still claim the full amount of 50% bonus depreciation on the vehicle.   

Depreciation per Year is as Follows:

                Section 179         50% Bonus Depreciation               Regular Depreciation

2012       $25,000                $17,500                                      $3,500

2013                                                                                  $5,600

2014                                                                                  $3,360

2015                                                                                  $2,520

2016                                                                                  $2,520

As you can see, 50% bonus depreciation helps taxpayers accelerate the timing of their depreciation deductions.

The reduced Section 179 deduction applies only to vehicles that are SUVs.  The following types of vehicles are not considered SUVs and are allowed a full Section 179 deduction ($139,000 in 2012).

  • Vehicles designed to fit more than nine passengers behind the driver’s seat—for example, a shuttle van
  • Vehicles equipped with a cargo area that is not readily accessible directly from the passenger compartment and that is at least six feet in length.  Many pickups with full-size cargo beds will qualify for this exception
  • Vehicles with (1) and integral enclosure that fully encloses the driver’s compartment and load carrying device, (2) no seating behind the driver’s seat, and (3) no body section protruding more than 30 inches ahead of the leading edge of the windshield.  Many delivery vans will qualify for this exception

The IRS’ concern was that luxury SUVs which are purchased primarily for personal reasons were being rapidly depreciated.  The three exceptions above are for vehicles that are essentially purely business vehicles that have no personal pleasure element.

If you need help with small business taxes,

sign up for a FREE tax consultation.

Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230

 

There are Still Tax Incentives to Buy Business Assets

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Background

When a business owner buys fixed assets such as machinery and equipment, the business owner cannot deduct the full cost of the asset immediately.  Instead, the business owner deducts the cost of the asset over a number of years through depreciation.  Most equipment purchased by small business owners is depreciated over 3 to 7 years.  A special deduction known as a Section 179 deduction exists that allows business owners to deduct in the year of purchase the cost of certain fixed assets.

Business owners are allowed to deduct up to $139,000 of the cost of eligible property acquired and placed in service during 2012. Eligible property is tangible personal property (e.g., equipment, machinery, computers, furniture) that is used more than 50% in a business.  However, if the business owner purchases more than $560,000 of such property, the Section 179 deduction is reduced dollar for dollar by the amount of assets purchased in excess of $560,000.

Example:  Joan buys $40,000 of furniture and $50,000 of equipment in her business.  Since the $90,000 total cost of these assets is less than $560,000, Joan is eligible to fully deduct the $90,000 purchase price.

Example 2:  John buys $400,000 of furniture and $200,000 of equipment in his business.  Since John’s total purchases of $600,000 exceed $560,000, his Section 179 deduction is reduced by the $40,000 excess of assets purchased over the maximum limit.  John may claim a Section 179 deduction of $99,000 ($139,000 maximum amount reduced by $40,000 of asset purchases over maximum limit).

Another important limitation on the Section 179 deduction is the taxable income limitation.  The Section 179 deduction cannot exceed the total amount of taxable income derived from the active conduct of ANY trade or business of the business owner or his/her spouse during the year.

Active business income includes:

  • Proprietorship income or loss
  • Partnership income or loss
  • S corporation income or loss
  • Wages
  • Certain gains from sales of business assets
  • Interest on working capital loans related to a business

Any Section 179 deduction limited because of inadequate taxable income can be carried forward indefinitely.

Example: Joan buys $40,000 of equipment in her proprietorship.  She has $15,000 income in her business before any Section 179 deduction.  Joan’s Section 179 deduction is limited to her taxable income of $15,000.  Her business will have no profit for the year since her taxable income was sheltered by her Section 179 deduction.  The disallowed Section 179 deduction of $25,000 will be carried forward to offset Joan’s future taxable income.

Example 2:  Same as above except Joan’s husband has $40,000 of wages from his job.  Active business income includes wages earned by a spouse.  The couple’s active business income is therefore $55,000 ($15,000 from Joan’s business and $40,000 from the spouse’s wages).  Joan can now deduct the full $40,000 of equipment purchases.

If the business owner operates through a LLC or S corporation, the taxable income limitation also applies at the entity level.

Example:  John operates his business through an S corporation, ABC Corp.  ABC Corp has $15,000 of taxable income.  ABC Corp buys $20,000 of qualifying property.  ABC Corp’s Section 179 deduction is limited to its taxable income of $15,000.  ABC Corp carries forward the excess $5,000 Section 179 deduction indefinitely.

For S corporations and LLCs, the active business income is increased by shareholder wages and guaranteed payments, respectively.

Example:  Same as above example except that ABC Corp paid John $10,000 in wages during the year.  The $10,000 of shareholder wages is added back to ABC Corp’s taxable income of $15,000.  ABC Corp’s active business income is now $25,000 and it can take the full Section 179 deduction of $20,000.

Of course John must have enough active business income on his personal return to utilize the Section 179 deduction.

Example:  On John’s personal return, the $25,000 of active business income from his S corporation flows through.  If John has a $10,000 loss from a separate business, his active business income is now $15,000 ($25,000 income from the S corporation less $10,000 loss from his separate business).  John’s Section 179 deduction is limited to his $15,000 active business income.  The remaining $10,000 of Section 179 will be carried forward by John.

What Type of Assets Don’t Qualify for Section 179?

Certain types of property are not eligible for Section 179 deduction.  These include:

  • Air conditioning and heating units
  • Property used to furnish lodging (with the exception of hotels and motels)
    • This prevents most taxpayers with residential rental property from claiming Section 179 deductions
  • Property used outside the U.S.
  • Property used by a tax exempt organization
  • Property used by governmental units
  • Property used by an estate or trust

What’s Changed Since 2011?

Before January 1, 2012, the maximum Section 179 deduction was $500,000 and this deduction was reduced dollar for dollar when property exceeding $2,000,000 was purchased during a year.  A special Section 179 deduction of $250,000 was allowed for certain purchases of real property.  The Section 179 deduction was therefore reduced from $500,000 to $139,000 in 2012.  The Section 179 deduction for certain real property purchases was eliminated at the end of 2011.  It is possible that Congress will retroactively reinstate the higher Section 179 deduction of $500,000.  But it remains to be seen.  Finally, unless Congress acts, the Section 179 deduction for 2013 will be $25,000.  A very substantial reduction.

For more information on how these rules apply in your situation, please give us a call.

Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

 

 


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