Last month, we spoke about the possibly devastating effects of the expiration of the Bush Era tax acts as it relates to income taxation, not just estate and gift taxes. This month we need to talk about business taxation. Because the President and current Congress were both re-elected, we are very concerned there will be no movement. If there is any compromise, it seems all the focus will be on marginal rates for income tax and trying to avoid “sequestration” of defense and welfare spending. To do that, they will need revenue, and business is the place they will get it.
An important item to consider is that Section 179 of the Internal Revenue Code allows you to fully depreciate equipment in the first year that would otherwise be spread over a period of years. The equipment does not have to be new, just new to you.
Under the last extension of the Bush Era tax acts, the Section 179 limit was $500,000 in 2010 and 2011. This year, the deduction limit on new and used equipment falls to $139,000. However, next year, the deduction limit drops to $25,000, the same small amount it was before the Bush Era tax acts. Unfortunately, we have not seen any compromise plan that includes keeping the limit where it is or raising it. You should really explore buying equipment now to preserve this important tax advantage.
Additionally, for equipment you buy in excess of the $139,000 and up to $560,000 in total equipment, there is 50 percent bonus depreciation in 2012 if the equipment is new. Next year, there is no bonus depreciation and just like the Section 179 deduction, there seems to be no compromise to extend it.
Below you will see a potential scenario if you purchase $560,000 of equipment this year or in 2013:
Cost of Equipment, Vehicles, and/or Software—$560,000
|Section 179 Deduction||$139,000||$25,000|
|50 Percent Bonus Depreciation Deduction (on any remaining amount above $139,000)||$210,500||$0|
|Normal First Year Depreciation||$42,100||$42,100|
|Total First Year Deduction||$391,600||$67,100|
|Cash Savings on Your Purchase (assuming a 35 percent tax bracket)||$137,060||$23,485|
|Lowered Cost of Equipment, Vehicles, and/or Software after Tax Savings||$422,940||$536,515|
The bottom line is that the same $560,000 in equipment will cost you $114,000 less in 2012 than it will in 2013.
Next month, we will update you about any compromises that happen and how they might affect your year-end planning.
|IRS Circular 230 Disclosure:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice 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 matters addressed herein.