The Clock is Ticking on Accelerated Write-Offs of Business Assets
With the end of 2013 rapidly approaching, calendar year taxpayers once again have a limited amount of time to take advantage of certain tax incentives related to recovering the cost of business assets. Last year at this time, it appeared that some of these incentives would expire (or be substantially reduced) at the end of 2012. However, the American Taxpayer Relief Act of 2012, which was enacted on January 2, 2013, extended the following favorable provisions.
50% Bonus Depreciation
The Act extended 50% first-year bonus depreciation for qualifying new (not used) assets that are placed-in-service in calendar year 2013. However, the placed-in-service deadline is extended to December 31, 2014 for certain assets that have longer production periods, including transportation equipment and aircraft. To be eligible for 50% first-year bonus depreciation, an asset must be (1) qualified property (which can include most purchased software costs and certain leasehold improvement costs), and (2) acquired by December 31, 2013. Also, the original use of the asset generally must commence with the taxpayer by no later than December 31, 2013 (December 31, 2014 for certain assets with longer production periods). Under the extended deadline privilege, however, only the portion of a qualifying asset’s basis that is allocable to costs incurred before January 1, 2014 is eligible for 50% bonus depreciation. For new passenger autos and light trucks subject to the luxury auto depreciation limitations, the 50% bonus depreciation increases the maximum first-year depreciation deduction by $8,000. Thus, the maximum first-year depreciation deduction for 2013 is $11,160 ($8,000 + $3,160) for new autos and $11,360 ($8,000 + $3,360) for new light trucks and vans (unchanged from 2012).
Section 179 Expense Election
For qualifying assets (generally, new or used tangible personal property) placed-in-service in tax years beginning in 2012 and 2013, the Act restores the maximum Section 179 deduction to $500,000 (same as for tax years beginning in 2011). Without this change, the maximum deduction would have been only $139,000 for 2012 and only $25,000 for 2013. The Act also restores the Section 179 deduction phase-out threshold to $2 million of investment in new assets for tax years beginning in 2012 and 2013 (same as for tax years beginning in 2011). Without this change, the phase-out threshold would have been only $560,000 for 2012 and only $200,000 for 2013. In general, the other pre-existing Section 179 rules were also extended through tax years beginning in 2013. For example, most purchased software costs will continue to be eligible for the Section 179 deduction through tax years beginning in 2013. Finally, the temporary rule allowing up to $250,000 of Section 179 deductions for qualifying real property placed-in-service in tax years beginning in 2010 and 2011 was retroactively restored for tax years beginning in 2012 and extended through tax years beginning in 2013. Note that the $250,000 Section 179 deduction allowance for qualifying real property is part of, not in addition to, the general $500,000 maximum allowance.
15-Year Depreciation for Real Property
The 15-year straight-line depreciation deduction for qualified leasehold improvements, qualified restaurant property, and qualified retail space improvements was retroactively restored for property placed-in-service in 2012 and extended to include property placed-in-service in 2013. It should be noted that qualified leasehold improvement property is eligible for 50% bonus depreciation, but restaurant property and retail space improvements that are eligible for 15-year depreciation are not eligible for first-year bonus depreciation. Therefore, for property placed-in-service after 2013, a 39-year write-off generally applies. This represents a substantial deceleration of the tax depreciation benefit.
This discussion is meant to be a very basic overview of the cost recovery rules in effect for 2013. Obviously, each business that is evaluating capital expenditures needs to undertake a detailed analysis based on its specific tax situation. This may even include a detailed “cost segregation” study or analysis if substantial improvements to a business facility have taken place.
Some of the factors that may need to be considered include:
- The anticipated effective tax rate in the year of the cost recovery deduction.
- Does the business have other tax attributes (e.g. net operating losses) that may expire in the near future?
- Is the business (or its owners) subject to AMT or the new surtax on net investment income?
- Can bonus depreciation be used to create an NOL that can be carried back to free up tax in prior years, thereby generating immediate cash flow?
- Do the states the business operates in allow bonus depreciation /Sec. 179?
- Do the deductions flow through the business to its owners? What is the impact on them? Again, “passive” owners may be impacted by the new surtax mentioned above.