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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