[IMGCAP(1)]The conclusion of 2013 brought the end of 55 tax breaks, including, most notably, enhanced Section 179 and bonus depreciation, the Research & Development Tax Credit, as well as the introduction of the new fixed asset regulations. The following discussion seeks to address the ramifications of the expiration of these highly favoured deductions and clarifies some of the underlying concepts contained in these new complex regulations.
One of the biggest tax planning tools that expired at the end of 2013 is bonus depreciation. Beginning in 2008, Congress enacted “bonus” depreciation provisions to give businesses substantial additional first-year depreciation deductions. Since the provision applies only to the purchase of new capital assets, bonus depreciation has provided significant incentives for making new investments in depreciable tangible property.
In 2011 and 2012, certain property was eligible for a 100 percent bonus depreciation deduction, while, for property placed in service in 2013, the first-year bonus depreciation deduction allowed on qualified tangible personal property and certain real property was 50 percent of the cost of such property. The remaining cost of the property was eligible for depreciation under the regular rules for such property.
With the expiration of the bonus depreciation provision at the end of 2013, it will be critical to carefully review new fixed asset additions made near year’s end to determine if those assets were placed in service by Dec. 31, 2013. There is no certainty at all whether Congress will enact or extend a bonus depreciation allowance for 2014 acquisitions of depreciable property. As such, the treatment of an asset placed in service on or before Dec. 31, 2013, may be significantly different than an asset placed in service after this date.
Section 179 Depreciation Deduction
Another significant tax planning tool that expired at the end of 2013 is the enhancement of the Section 179 depreciation deduction. This code section allows for a business to expense the purchase of capital assets, such as machinery, equipment, furniture, vehicles and fixtures to name a few, in the year of purchase, rather than depreciating them over their useful lives.
Generally, if you purchase depreciable tangible personal property, you may elect to treat up to $500,000 as a deduction for property placed in service in taxable years beginning in 2013. However, the benefits of this election begin to phase out if more than $2,000,000 of qualifying property is placed in service.
The Section 179 deduction brings significant tax savings by reducing the tax liabilities for most business entities, including independent contractors, sole proprietors, partnerships and corporations. The deduction applies to the purchase of new or used assets and is limited to the amount of trade or business income, with any excess being carried forward to the subsequent tax year.
When this enhanced provision expired at the end of 2013, Section 179 reverted back to 1986 tax law when the deduction was first introduced. This means that, for 2014, the maximum deduction for Section 179 will decrease to $25,000, with the benefits phased out for property purchases over $200,000, unless Congress extends the application of prior-year limitations.
Similar to the expiration of bonus depreciation, the expiration of the enhanced Section 179 amount should force a very careful review of year-end asset additions, in order to claim the highest possible benefit for any assets that qualify.
The R&D credit is available for taxpayers who make investments to try to develop or improve their products, manufacturing processes, and software. Taxpayers in almost every industry report over $8.5 billion in R&D credits annually.
The credit is based on three types of payments:
- Qualified research expenditures (“QREs,” i.e., certain expenses paid or incurred, generally, for product, process, and software development and improvement activities);
- Payments to qualified organizations for basic research; and,
- Payments to energy research consortia for energy research.
The R&D credit also expired as of Dec. 31, 2013. As it currently stands, research expenditures paid or incurred after Dec. 31, 2013, cannot be factored into the amount of the credit available to a taxpayer.
Since Congress has extended the R&D credit 15 times since its inception in 1981, the outlook is quite promising that it will be extended to cover research costs paid or incurred in 2014. As such, practioners should review their client’s activities in 2013 to determine if any qualify for this valuable credit.
New fixed asset regs
In 2013, the Internal Revenue Service and the Department of Treasury issued final regulations that introduced a number of new provisions addressing the capitalization of acquired, produced or improved property, including repair and maintenance costs. These new regulations are mandatory beginning in 2014 but can be adopted for 2012 or 2013 at the taxpayer’s option. Major areas and new provisions of the regulations include:
- De minimis expensing safe harbor election;
- Small-taxpayer safe harbor expensing election;
- Deductible routine maintenance for equipment and buildings;
- Deductible repairs/capital improvements to property;
- An election to conform to financial accounting to capitalize deductible repair and maintenance expenses; and,
- Partial disposition of property.
Material savings may be obtained for any taxpayers with significant amounts of fixed assets, so a careful review of the new regulations, as well as a review of the capitalization policies and procedures in place for any taxpayer, should be performed to assess the impact the new regulations will have.
While filing a timely tax return on March 15 is often top of mind, companies should also consider the time and resources needed to properly file and effectively reduce their tax liability. With the introduction this year of the new fixed asset regulations, as well as the expiration of other provisions, it may be beneficial for taxpayers’ to apply for a six-month extension to ensure time for adequate research and consideration into the impact of all these changes.
Doug Bekker is tax managing partner at BDO USA.