[IMGCAP(1)]Enhanced Section 179 expensing allowances, along with dozens of other “temporary” tax provisions, expired at the end of last year.
For tax years beginning in 2014, the expensing limit has dropped from the generous $500,000 to $25,000. That’s where it will stay, unless Congress acts retroactively to extend the more generous allowance. While both houses of Congress currently have extenders legislation up for consideration, election year politics give no reason for optimism.
However, there are still some small businesses that may be able to take advantage of the enhanced expensing limits, according to Bill Norwalk, tax partner-in-charge at Silicon Valley-based CPA firm Sensiba San Filippo.
“Entities with a fiscal year that began in 2013 may still qualify for the enhanced amount,” he said. “While calendar year companies are out of luck, the Code applies the Section 179 limits and the qualifying property phaseout threshold to assets placed in service during the fiscal year. So if an entity’s fiscal year began in 2013, it can take advantage of the enhanced amount.”
Since it may be the last year they can get the enhanced expensing amount, it makes sense for entities that qualify to think about making qualifying purchases prior to the end of their fiscal year, according to Norwalk.
The annual deduction limit is reduced dollar for dollar for companies that purchase over the threshold amount, he observed. “For 2013, the threshold was $2,000,000, so the amount a company can expense gets phased out if they purchased over $2.5 million in equipment.”
For 2014, the threshold is $200,000, Norwalk noted. “So if the company purchased, say, $220,000 of qualifying property, they would only be allowed to expense $5,000. As long as the amount they purchase is below $200,000, they can expense the full $25,000 allowed for 2014.”
“If a corporation has a fiscal year that ends June 30, it can reduce its taxable income now if it has capital equipment needs,” Norwalk said. “If it makes its purchases in July or later, it wouldn’t have the same amount of tax savings. It’s a way to change the economics of purchasing decisions.”
Bonus depreciation, which also expired at the end of 2013, applies only to assets placed in service during the calendar year, Norwalk noted. “The entity can only take bonus depreciation if the asset was purchased prior to Dec. 31, 2013. There can be some interplay between the use of Section 179 and the bonus depreciation rules,” he observed.
“Many companies delay their capital expenditures until the last minute, but this year is different,” he said. “Once the ability to use the enhanced limits expires, many companies may find themselves with a tax liability that could damage their profitability in an election year that is already complicating tax planning for small and medium-size businesses.”