Wednesday, January 7, 2015

Depreciation and Section 179 deduction

Barry Dolowich for the Monterey Herald writes: Question: I expanded my business in 2014 and purchased a significant amount of furniture, fixtures and equipment. Will I be able to deduct all these purchases on my 2014 tax returns? In addition, will the rules be the same in 2015 if I continue to expand?

A You will be able to deduct part or all of your expenditures in 2014 to help offset your income, reducing your tax obligation. The furniture, fixtures and equipment you purchased are considered capital asset expenditures subject to specific depreciation rules. Generally, the cost of these assets must be depreciated over a specified recovery period (five or seven years). This means that you will be claiming a depreciation deduction (spreading the cost) throughout the respective recovery periods.

However, an expense deduction is provided for taxpayers (other than estates, trusts or certain noncorporate lessors) that elect to treat the cost of qualifying property, called Section 179 property, as an expense rather than a capital expenditure. Section 179 property includes all personal property (not real property) used in a trade or business for the production of income. A car or truck can qualify as Section 179 property. The election, which is generally made on Form 4562, is attached to the taxpayer’s original tax return for the year the property is placed in service. Individuals (sole proprietors) attach Form 4562 to their Form 1040, and corporations and partnerships attach Form 4562 to their respective business tax returns. Employees may make the election on Form 2106, also attached to Form 1040.

The Section 179 deduction allows you to choose to treat part or all of the cost of the equipment and furniture as an expense, rather than taking depreciation deductions over many years. As an expense, the Section 179 amount is deductible only in the year the assets are placed in service. For this purpose, “placed in service” means the year you first used the assets for business purposes.

For 2014, the tax law allows you to treat up to $500,000 of the cost of qualifying property as a Section 179 deduction. The 2014 maximum amount is reduced by a dollar for each dollar of the cost of qualified property placed in service during the tax year over $2 million. If you take the maximum Section 179 deduction of $500,000, you can still depreciate the excess cost over $500,000 of the assets over a period of years.

In addition, most new property placed in service during 2014 also qualifies for a bonus 50 percent first-year depreciation allowance. The bonus allowance is applied to the property’s adjusted basis as reduced by any Section 179 expensing for the property, and regular depreciation is applied to the property’s adjusted basis after a reduction to reflect the bonus depreciation allowance.

If you dispose of the assets on which you had claimed the Section 179 deduction, the amount of that deduction is treated as a depreciation deduction for recapture purposes. Any gain on the disposition of the property is treated as ordinary income up to the amount of the Section 179 deduction and any depreciation you claimed.

The total cost of property that may be expensed for any tax year pursuant to Section 179 cannot exceed the total amount of taxable income derived from the active conduct of any trade or business during the tax year (the deduction cannot create a loss). A deduction disallowed under this rule is carried forward an unlimited number of years subject to the ceiling amount for each year. Special rules also apply for assets used for both personal and business purposes.
On Dec. 19, 2014, President Barack Obama signed the Tax Increase Prevention Act of 2014 extending the $500,000 Section 179 deduction limit through 2014 only. The Section 179 limit will return to the $25,000 level (with a $200,000 investment limit) in 2015 unless Congress takes action to extend it again.

I recommend that you consult with your tax adviser to determine the best strategy to utilize the Section 179 deduction and/or bonus depreciation.


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