Today and in the next two weeks we will take a look at year-end tax planning as it relates to purchases of equipment.
An expanding and strengthening economy may mean that December, 31, 2013 will be the end of the line for some stimulus-type tax breaks. Unless Congress acts, 50% bonus depreciation generally won't be available for property placed in service after this year.
Also slated for disappearance is the 15-year write-off and special expensing allowance for qualified leasehold improvement property, retail improvements, and restaurant property.
Finally, the overall Code Sec. 179 expensing limit is slated for a drastic reduction for property placed in service next year. Thus, companies should try to accelerate their buying plans if they are planning to purchase machinery and equipment or invest in eligible real estate assets during the remainder of this year or early 2014.
Making the Most of Code Section 179 Expensing Limits for 2013
Under Code Sec. 179, a taxpayer can elect to deduct as an expense, rather than to depreciate, up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in the taxpayer's trade or business. This does not apply an estate, trust, and certain non-corporate lessors.
The maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of Code Sec. 179 property placed in service during the tax year in excess of a specified investment ceiling. The amount eligible to be expensed for a tax year can't exceed the taxable income derived from the taxpayer's active conduct of a trade or business. Any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding tax years.
Expensing limits for 2013
For tax years beginning in 2013:
The dollar limitation on the expensing deduction is $500,000.
The investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $2 million dollars, which is the investment ceiling.
For tax years beginning after 2013:
The maximum expensing limit is scheduled to drop to $25,000, and the investment ceiling is scheduled to drop to $200,000.
Congress isn't likely to allow the expensing limit and investment ceiling limit to drop this drastically, but it could well legislate a significant reduction in today's generous limits.
Where possible, taxpayers should factor the annual expensing limits for 2013 and the possible drop in these limits for 2014 into their annual equipment-purchase plans.
Disclaimer: The items included in the Tax Tip Tuesday Video Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation. IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advise contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.