If there's one thing business owners have learned about depreciation, it's that depreciation rules change every year. With that in mind, as we enter the last quarter of 2012, what changes to the depreciation deduction can we expect in 2013 and how can we plan for it today?
Currently, there are two major tax provisions that determine how much depreciation a business can deduct in the first year it acquires property. These tax provisions are Section 179 and Section 168(k) – also known as bonus depreciation. As the law stands in 2012, Section 179 depreciation can be taken on new or used property up to $139,000 (adjusted for inflation). This allows businesses to fully deduct the cost of the property in the year it acquires it instead of deducting a portion of cost over its useful life. A caveat to keep in mind when considering Section 179 depreciation is that it cannot be used to create a loss. Therefore, if a business is in the red, Section 179 cannot be used.
Bonus depreciation, alternatively, has no maximum deduction but only allows businesses to deduct 50% of the cost of the property while deducting the remainder of the cost of the property over its useful life. Also, unlike Section 179, Bonus Depreciation can be used to create a loss that can be carried forward or back.
Both Section 179 and bonus depreciation have requirements as to what property qualifies.
- Simply stated, tangible business property will qualify for both Section 179 and bonus depreciation.
- Off the shelf software qualifies for Section 179 only and real estate doesn't qualify under either Section 179 or bonus depreciation.
- What about vehicles? It depends. Vehicles under 6,000 lbs. are subject to certain limitations while vehicles over 6,000 lbs. are unrestricted. This 6,000 lbs. threshold requirement applies to both Section 179 and bonus depreciation.
How will these laws change in 2013? Section 179 depreciation will be capped at $25,000 and bonus depreciation will disappear. This can have major tax consequences for your business if you're debating on whether to purchase property now or wait until a later date.
Is it possible that Congress can change the depreciation rules for 2013 between now and the end of the year? A lot will depend on who get elected in November. Absent new legislation, Section 179 and bonus will be reduced or eliminated next year. If possible, businesses should consider accelerating purchases into 2012 to take advantage of these expiring provisions.
Have questions on how purchasing property will affect your tax situation? Contact our Tax Planning & Preparation Services Group at 440-449-6800.