Enhancement limit for 2014, reduction for 2015
For small-business owners who frequently buy new equipment and other assets for their business activities, the new tax law enacted at the end of 2014—the Tax Increase Prevention Act (TIPA)—provides a temporary reprieve. Signed on December 19, 2014, TIPA extended a Section 179 deduction retroactive to January 1, 2014. But this provision expired—again—on December 31, 2014. As things now stand, the maximum deduction will fall precipitously in 2015 unless Congress takes further action.
Background: Under Section 179 of the tax code, a taxpayer currently can elect to deduct, or “expense,” the cost of qualified business property purchased and placed in service during the year. After the maximum allowance was quadrupled from $25,000 to $100,000 by a 2003 tax law, inflation adjustments pushed the limit even higher. Subsequent legislation increased the maximum deduction to its high point of $500,000.
Under the new law, the maximum $500,000 deduction is extended through the end of 2014. For example, if you acquired qualified equipment last year for $300,000 and placed it in service before 2015, you can write off the entire $300,000 in 2014. Absent any action by Congress, the maximum allowance will plummet to $25,000 in 2015.
In addition, TIPA preserved the 50% bonus depreciation on the cost of new qualified property placed in service last year. The bonus depreciation tax break generally expired after 2014, along with the enhanced Section 179 deduction. The two tax breaks may be used in conjunction for tax year 2014.
The Section 179 election is open to most business taxpayers, but two important rules may limit your annual deductions.
1. Annual business income limit: The expensing deduction cannot exceed the net taxable income from all the businesses you actively operate. For this purpose, net income is figured without regard to expensing, the 50% deduction for self-employment tax, and any net operating loss (NOL) carryforwards or carrybacks.
2. Annual dollar cap: If the total cost of qualified business property placed in service during the year exceeds an annual threshold, the maximum expensing allowance is reduced on a dollar-for-dollar basis. This threshold has been increased in step with the changes in the maximum Section 179 allowance. The threshold for 2015 is currently set at only $200,000 (down from $2 million in 2014).
For example, say that a business buys a total of $205,000 of equipment in 2015. Under current law, the maximum Section 179 allowance will be reduced to $20,000 ($25,000 minus the $5,000 exceeding the $200,000 threshold). While this reduction rule does not affect many small businesses, you should still be aware of the possible consequences. Keep it in mind as the year progresses.
Taxes are an important factor when you consider equipment purchases. Make sure you are aware of how the two tax law limits may affect your Section 179 deductions. Also, stay on top of any developments regarding the maximum allowance. You can rely on your professional tax advisers to provide guidance before you proceed.