Congress extended bonus depreciation and more robust Section 179 expensing through year-end 2013 as part of last January’s fiscal cliff deal, and now as the deadline is approaching, small business owners are looking anew at capital purchases. If you’re on the border line of whether you’re going to make some capital asset acquisition this year or next, you might want to accelerate it into this year.
“Especially this year if there’s a major purchase, it makes sense to do it,” says Jennifer Prosperino, a CPA and tax principal with Berdon LLP in New York City. “With the uncertainty, why take your chances?”
Also, the additional deduction is especially valuable to those facing the new higher tax rates for 2013, including the Medicare surtax on wages and self-employment income, notes Mark Nash, a Dallas-based partner in PwC’s Private Company Services practice.
Under the law now, bonus depreciation ends Dec. 31, and Sec. 179 becomes way less powerful as of Jan. 1. The dollar limits for Sec. 179 expenses is scheduled to drop on Jan. 1 to $25,000 with a $200,000 investment ceiling (from $500,000 today, with a $2.5 million investment ceiling).
So you’re looking at a known $500,000 tax break for 2013 versus an unknown 2014 tax break.
That’s the sales pitch Jeff Connally, chief executive of IT service provider CMIT Solutions, says his franchise partners are using in their year-end sales pitches to small businesses. It coincides with another reason small businesses might need to upgrade their computer systems—Microsoft MSFT -0.94% has announced it will end support for its Windows XP operating system next spring. And off-the-shelf computer software is specifically included in the definition of property that counts for the enhanced deduction through 2013. “Forward thinking clients are making the transition now; why not capture a known tax advantage?” Connally says.
One client, James Caruolo, just inked a $15,000 purchase of computer hardware and software for his 7-person law firm in Warwick, R.I. “The fact that we could expense that out 100% this year was a huge selling point,” Caruolo says. “We see the advantage this year; we’re going to take it.”
Does it make sense to accelerate purchases that might be deductible next year? Generally if you have the income this year to offset, it’s better to take the deduction now. “If there’s room this year, you might as well take it,” Prosperino says, adding that you never know what expenses might come up next year.
Here are some details. Under Sec. 179, small business owners (that includes a self-employed consultant) can deduct the entire cost (100%) of up to $500,000 of new or used computer equipment, vehicles, furniture—most depreciable assets that have less than a 20-year life.
With bonus depreciation, a company can deduct half the cost of new capital purchases in the first year. It can still be more valuable than the Sec. 179 break because the Sec. 179 deduction is limited to business taxable income with any excess carried forward. But if you’re actively involved in running a business, you can not only claim losses generated by 50% bonus depreciation against other income but can also carry any still unused losses back for two years and get a refund check from Uncle Sam.
What’s up for next year? “It’s pretty clear that Congress won’t extend these breaks by the end of the year, and next year we could end up with a year like 2012 where we went the whole year before they were renewed,” says Mark Luscombe, a federal tax analyst for CCH, a Wolters Kluwer business.
Keep an eye on Congress. There are bills on the table that would to extend 50% bonus depreciation for three years –and one that would make it applicable to “used” dairy producing calves and cows.