Are you contemplating the purchase of new equipment or other assets for your small business? It’s a good time for many business owners to “spin straw into tax gold.” Reason: Under the new tax law signed earlier this year—the American Taxpayer Relief Act of 2012 (ATRA)—you can claim a generous current deduction of up to one-half million dollars for property you acquire for your business. There is no guarantee this favorable write-off will be available after 2013.
Background: Under Section 179 of the tax code, a taxpayer can elect to currently 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. Eventually, subsequent legislation increased the maximum deduction to its high point of $500,000. Following an extension by a 2010 tax act, the deduction was scheduled to drop drastically after 2012.
Now ATRA comes to the rescue, at least for the time being. Under the new law, the maximum $500,000 deduction is extended again through the end of 2013. For example, if you buy qualified equipment for $300,000 and place it in service by December 31, you can write off the entire $300,000. Absent another extension or modification by Congress, the maximum allowance will plummet back to $25,000 in 2014.
In addition, ATRA preserves 50% bonus depreciation on any remaining cost of qualified property your business places in service this year. The bonus depreciation tax break is generally scheduled to expire after 2013. Finally, if there is any cost still remaining, your business can write off the balance under the regular depreciation rules.
The Section 179 election is wide open to most business taxpayers, but there are two important rules that may limit your annual deductions.
- Annual business income limit: The Section 179 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 carryforwards or carrybacks.
- Annual phaseout threshold: If the total cost of qualified 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 maximum Section 179 allowance. The threshold for 2013 is set at $2 million.
For example, say a business buys $2.1 million of equipment in 2013. In this case, the maximum Section 179 allowance is reduced to $400,000 ($500,000 minus the $100,000 over the $2 million threshold). While this reduction rule won’t affect many small businesses, you still should be aware of it. After 2013, the threshold is scheduled to revert to $200,000.
In summary: Taxes are an important consideration in equipment purchases (although there are other variables). Make sure you are aware how the limits may affect your Section 179 deduction and other write-offs. You can rely on your Lohman Company tax advisor to provide guidance before you plunk down your money.