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Section 179 Deductions: Tread Carefully in 2014

Normally, a manufacturing firm can buy business equipment safe in the knowledge that it will qualify for an immediate write-off on most, if not all, of the cost under Section 179 of the tax code.

But this year is different from others. The maximum Section 179 deduction for 2014 is set at $25,000, which may seem paltry after years of generous six-figure allowances (see box below). And this may curb your spending plans, unless Congress acts soon to extend bigger benefits for Section 179 property. There is no guarantee it will.

Tax law permits any type of business to deduct the cost of qualified business property placed in service during the year. For this purpose, qualified business property includes most types of new or used tangible personal assets.

Another favorable tax law provision affecting write-offs for business property — the 50 percent bonus depreciation deduction — is strictly limited to new property. In certain situations, your firm can choose to take the Section 179 deduction and the bonus deduction for the same new property.

But the bonus depreciation generally is not available for property placed in service after 2013, unless Congress extends it.

The Colored History of the Deduction

The maximum Section 179 deduction gradually increased to $125,000 in 2007 from $20,000 in 2001. Then it really took off. It was doubled in 2009 and doubled again to $500,000 in 2010.

The $500,000 maximum was preserved through 2013. At various points during those years, the maximum deduction was scheduled to drop precipitously, but that never happened … until now.

The current $25,000 maximum is the lowest it has been since 2002 when it was $24,000. There’s been some momentum in Washington to restore a higher allowance, but partisan politics has intervened, leaving the status of the limit in limbo.

Two Key Tax Limits

The lower maximum Section 179 deduction isn’t the only obstacle in the way. There are two other key tax law limits that could hamper your equipment-buying decisions.

1. The annual income limit: The Section 179 deduction can’t exceed net taxable income from business activities. If you have a $20,000 profit in 2014, the deduction will be limited to $20,000 even if the maximum is raised. If you operate several businesses, the limit applies to the total net taxable income from all your operations, not to each business.

2. The annual dollar threshold: If the total cost of property you place in service during a year exceeds an annual threshold, the maximum Section 179 deduction is reduced on a dollar-for-dollar basis. This dollar threshold has been adjusted by legislation in conjunction with the maximum Section 179 allowance. The threshold is $200,000 for 2014 (down from $500,000 for 2013). At one point, it was as high as $2 million.

So if your firm buys $215,000 of equipment and places it in service in 2014, and the $200,000 threshold is allowed to stand, the firm’s maximum Section 179 deduction would be reduced by the $15,000 that exceeds the threshold to just $10,000. On the other hand, if the business keeps its equipment purchases below the $200,000 threshold, it can claim the maximum $25,000 deduction, provided it has at least that much in taxable income.

Lessons to Be Learned: During the past few years, the basic tax strategy for most profitable manufacturers was relatively simple: Buy as much equipment as needed throughout the year and take the Section 179 deduction for the entire cost or an amount close to it. Any remaining balance could be written off with the 50 percent bonus depreciation and regular depreciation deductions over the cost recovery period.

The current tax landscape, however, is considerably more complex.

Bottom line: Keep a close watch on your expenditures and stay apprised of any developments in Congress. You will want to remain close to the $25,000 limit in case the allowance isn’t raised for 2014. Don’t go well beyond the limit until you receive a clear sign of a change.

Finally, be aware that other tax and economic circumstances may come into play. For instance, if you expect 2014 to be a low-income year for the business and you anticipate that your tax liability will be much higher next year, you might bypass the maximum Section 179 deduction this year or wait to buy business property in 2015, when the higher deduction amount will be more valuable to you.

Meet with your tax advisor for help developing a plan for 2014 that takes into account the prevailing conditions while allowing for some flexibility.

Example:
Suppose you don’t have cash on hand to make equipment purchases this year. The tax law lets you write off the full amount of the cost, up to the maximum, even if you finance the purchase.

Example: A manufacturing firm wants to buy $25,000 of equipment, but can only afford to pay $10,000 from company funds. It borrows the $15,000 needed for the deal. The firm can still deduct the entire $25,000 under Section 179 — even though more than half of the cost is financed.

Icing on the cake: Any finance charges paid on the loan are generally deductible as business interest.

Tax Year

Maximum Deduction

Threshold

2000

$20,000

$200,000

2001-2002

$24,000

$200,000

2003

$100,000

$400,000

2004

$102,000

$410,000

2005

$105,000

$420,000

2006

$108,000

$430,000

2007

$125,000

$500,000

2008-2009

$250,000

$800,000

2010-2013

$500,000

$2,000,000

2014

$25,000

$200,000

© 2014