Small business owners have become accustomed to the ability to deduct significant amounts of purchased business assets in the year of acquisition. But the future status of this deduction remains unclear and has an impact on decisions, such as buying equipment for the business.
This so called “Section 179” deduction has been significantly increased in recent years. After 2009 and prior to January 1, 2014, the Section 179 expense annual limitation was generally $500,000 of placed-in-service tangible property. The $500,000 in-service limitation was reduced dollar-for-dollar for placed-in-service qualifying assets exceeding $2,000,000. Thus, to the extent a taxpayer had Section 179 qualifying assets placed-in-service during a tax year in excess of $2,500,000, the Section 179 allowed deduction would be reduced to zero. There have been expansions in recent years in the definition of Section 179 qualifying property to include software and other qualifying real property, among others.
Where We Are Now
Business owners are asking me about Section 179 for 2014 and later years as they try to decide whether to buy equipment or possibly defer these purchases.
As of the writing of this article, the maximum Section 179 expense that a taxpayer may claim is $25,000 for tax years beginning in 2014 and after and this amount is phased-down further, dollar-for-dollar to the extent purchases exceed $200,000 during the tax year. Also, the definition of qualifying Section 179 property does not include software or qualifying real property.
Likelihood of 2014 Retroactive Increase
The Kiplinger Tax Letter of May 9, 2014 makes the bold prediction that the Section 179 provisions will be retroactively reinstated to January 1, 2014 at the $500,000 level with the in excess of $2,000,000 placed in-services phase-out. When will this be certain? Kiplinger predicts not until after the November 2014 elections. That is comforting for business owners trying to plan ahead!
In fact, the U.S. House of Representatives has introduced legislation to permanently set the Section 179 expensing level at $500,000 and $2,000,000 phase out levels and also index these amounts for inflation. The President’s 2014 Budget and the Treasury Explanation of the President’s fiscal year 2015 administration budget both propose the permanent $500,000 and $2,000,000 expensing and phase-out levels. Note, however, that Representative Camp’s tax reform proposal, released February 26, 2014 has expensing provisions set permanently at $250,000 and $800,000 phase-out levels for 2014 and later years indexed for inflation.
For 2014 we currently are in limbo regarding small businesses’ ability to expense significant asset acquisition costs. Commentators, legislative and administrative proposals suggest that the 2014 and future Section 179 expensing provisions will be reinstated to levels similar to the 2010-2013 amounts and will be made permanent and indexed for inflation. Whether such a reinstatement and permanent extension will in fact occur is yet to be seen.
Legislators in Washington are having difficulty agreeing on anything these days. Providing revenue offsets to pay for the tax extender provisions (including increased Section 179 amounts) adds more complexity to negotiating the favorable Section 179 provisions. Please contact your DS&B, Ltd. account representative to further discuss the status of Section 179 provisions and implications for your business asset purchase decisions.
Disclaimer: All content provided in this article is for informational purposes only, and is subject to change. Contact a DS+B professional before using or acting on any information provided in this article