FIVE DEPRECIATION TIPS FOR YEAR-END TAX PLANNING

Brandon Harbeke, CPA  writes:  1. Avoid the mid-quarter convention. Assets purchased in the second half of the year are entitled to less depreciation in the first year under the mid-quarter convention than under the standard half-year convention. Property is subject to the mid-quarter convention if more than 40% of the depreciable assets purchased during the year are purchased in October, November, or December. If some purchases can be made before or after the last quarter, that will help decrease the percentage below 40%. Another approach is to claim the Section 179 deduction for those fourth quarter items, which removes them from the 40% calculation altogether.

2. Be careful when electing Section 179 expense if you have a fiscal year partnership or S corporation. Those businesses can take up to $500,000 of Section 179 expense for years beginning in 2013 and ending in 2014. However, the owners of those businesses will report the K-1 activity from that fiscal year on their 2014 tax returns. Under current tax law, the 2014 Section 179 limit is $25,000. Any amount flowing to the owners in excess of $25,000 is unable to be deducted or carried to another year. There is no guarantee that a fix for this scenario will be passed into law.

3. Make use of 50% bonus depreciation. This tax provision will expire after 2013, so businesses planning on making large purchases of depreciable personal property should consider scheduling those purchases before the end of the year to receive this accelerated depreciation.

4. Take advantage of the higher Section 179 limit for 2013. If your business is not a fiscal year pass-through entity, and it needs equipment or improvements of more than $25,000, then the last months of 2013 can be a great time to purchase assets eligible for the Section 179 deduction. As mentioned above, the limit will decrease from $500,000 to $25,000 on January 1, 2014.

5. Draft and use a capitalization policy before the end of the year. New repair and capitalization regulations go into widespread effect in 2014. Having a written policy in place offers de minimis safe harbors for companies to write off repairs, supplies, and purchases under a specified dollar amount. This amount is $500 for any business and $5,000 for businesses with certified audited financial statements or financial statements that are required to be sent to the SEC or other government agency.