Q: What do the 2014 capital investment incentives (depreciation bonus and increased Sec. 179 expensing) mean for my business?
A: By lowering your taxable income, the depreciation bonus and Sec. 179 can cut your 2014 tax bill, thereby freeing up cash in the near term.
Q: Is there any downside to taking advantage of bonus depreciation?
A: The more you depreciate now, the less you’ll be able to depreciate later. In other words, your tax bill in future years may be higher because you’ll have less to deduct. But ask yourself this: Would you rather have the tax savings in your pocket now to invest in your company or would you rather have Uncle Sam hold onto your money for a couple additional years?
Q: How does the depreciation bonus work?
A: Companies that buy new equipment in 2014 can depreciate 50 percent of the cost in the first year, plus the percentage of the remaining basis in the equipment that would ordinarily be depreciable under MACRS. For a $100,000 piece of equipment with a five-year MACRS life, the 2014 depreciation would be $60,000: $50,000 depreciation bonus, plus 20 percent of the remaining $50,000 basis. However, this is just a general example of how the law works. Every taxpayer is unique, so check with your tax professional about whether and how you would benefit from bonus depreciation.
Q: Does the equipment have to be new to qualify for the depreciation bonus?
A: Yes. To be eligible, the “original use” of the equipment must commence with the taxpayer claiming the depreciation bonus after Dec. 31, 2013.
Q: If I’m leasing a piece of equipment and I decide to buy it, can I claim the depreciation bonus?
A: There is one very limited exception to the “new” requirement. If Company A is leasing a piece of equipment (e.g., from a distributor) and Company A is the first and only user of the equipment (i.e., it hasn’t been rented or leased to any other customer) and Company A converts the lease to a purchase within three months of the start of the lease period, then Company A may claim the depreciation bonus on the equipment. Check with your tax professional for more details.
Q: How long do I have to take advantage of the deprecation bonus?
A: The depreciation bonus is temporary. To qualify, the new equipment must be acquired and placed in service by the taxpayer claiming the depreciation bonus before Jan. 1, 2015.
Q: Do I have to use the deprecation bonus?
A: No. You may elect out of depreciation bonus (meaning it’s your choice whether to use it). Additionally, in lieu of claiming bonus depreciation, companies may instead elect to accelerate alternative minimum tax (AMT) credits.
Q: What are the Sec. 179 expensing limits for 2014?
A: For the tax years beginning in 2014, companies can expense up to $500,000 as long as total purchases do not exceed $2 million. For each dollar over $2 million, the eligible expensing amount correspondingly drops by one dollar. Thus, companies that spend more than $2,500,000 on tangible personal property cannot take advantage of Sec. 179 (but they can still use the depreciation bonus, assuming the equipment meets all the qualifications).
Q: Does the equipment have to be new to qualify for Sec. 179?
A: No. Unlike the depreciation bonus, Sec. 179 expensing can be applied to both new and used equipment.
Q: Can Sec. 179 and the depreciation bonus be combined?
A: Yes. Companies eligible for Sec. 179 can also combine it with the depreciation bonus for even bigger tax savings.
Q: Do the TIPA capital investment incentives apply only to construction equipment?
A: No. A broad range of tangible personal property (but not real estate) is eligible for special tax treatment in 2014.
Q: Where can I get more information about bonus depreciation and Sec. 179?
A: IRS Publication 946 - How to Depreciate Property provides a good overview of how bonus depreciation and Sec. 179 operate. Keep in mind that the guidance document hasn’t yet been updated for 2014, so keep the date changes from the TIPA in mind when you read it.
Q: Where can I get more information about everything that was in the Tax Increase Prevention Act?
A: A section-by-section summary of the Tax Increase Prevention Act prepared by the House Ways & Means Committee is available here.
Q: What should I do if I have other questions?
A: Contact your accountant, attorney, or other tax professional in your area if you have further questions.