In 1982, the IRS tax code initiated a provision for first-year write-downs on the purchase of most personal property being used in a trade or business. This allowed operating companies to take advantage of an IRS Section 179 deduction on their business tax returns. In 1982 when Section 179 was implemented, the allowable tax deduction was $5,000, this amount was increased over the years, and in 2010 through 2013 the amount was $500,000. For 2014, that the maximum allowable Section 179 expense will drop to $25,000, reverting to pre-economic incentive Act limitations. This is a significant reduction in the amount available, and it should be factored into 2014 budget calculations.
An overview of Section 179
Generally speaking, any fixed asset placed in service would have to be capitalized and depreciated over a set number of years until its book value is zero. Capitalizing assets delays the availability of tax deductions. Qualified Section 179 deductions allow the entire cost, with certain stipulations, to be taken immediately in the year the asset is placed in service. For a business, these immediate deductions are very valuable as it frees up cash for expansion, growth, and self-investment.
There has always been a dollar limit to the IRS Section 179 deduction; in 2013 the amount was $500,000. This part of the tax code allowed the owner of the business to take an immediate deduction instead of deprecating a qualified asset over time. Unless Congress extends the incentive, this amount is set to drop to $25,000 in 2014. Also to the maximum dollar limitation, the deduction is reduced if qualified 179 property exceeds a specified investment limitation. If the purchase of qualified 179 property exceeds $2,000,000 in 2013, the $500,000 limitation will be reduced dollar for dollar. The 2014 investment limitation is currently set at $200,000.
Other incentives expected to be retired bonus depreciation; qualified leasehold, restaurant, and retail improvement recovery periods; capital gain rates; and top-bracket income tax rates. With all the potential complexities that are bound to arise from these changes, it is important for business owners to seek professional advice.