Consistent with recent years, the Internal Revenue Code (IRC) Section 179 is set for a drastic reduction in 2015. This provision of the tax code allows accelerated depreciation deductions (i.e., expensing) for certain business property placed in service during the year. Business owners should consider taking the necessary steps to plan equipment purchases prior to December 31, 2015, as Congress may extend this provision, retroactively, through the end of the year (exactly the way it did at the end of 2014).
In general, business equipment is depreciated over a number of years, so that the purchase price is deducted against business income over time. However, the Section 179 provision allows the depreciation deduction on certain business equipment to be accelerated and taken entirely (subject to several limitations) in the current year.
By the Numbers
There are two thresholds that must be considered when planning for this deduction, and these amounts are the maximum deduction limit and the purchase price phase-out. The phase-out provision essentially restricts this tax break to small and mid-sized companies because large firms often purchase amounts in excess of the limit.
The tax code currently calls for the expensing deduction to be capped at $25,000, with a dollar-for-dollar phase-out beginning at $200,000. Thus, if your company buys $210,000 worth of equipment, the excess $10,000 reduces the expensing limit from $25,000 to $15,000.
In truth, those $25,000 and $200,000 numbers are not realistic today. Congress has repeatedly passed tax laws with higher limits. In recent years, expensing up to $500,000 worth of equipment has been permitted, with a phase-out starting at $2 million of annual purchases. All signs point to a repeat performance for 2015. Both Houses of Congress already have indicated willingness to extend some expired tax breaks, including the $500,000 and $2 million limits for expensing business purchases.
Based on history alone, I believe Congress will extend the higher deduction limit and purchase threshold. As such, I recommend proceeding with purchases of equipment that will help your business increase productivity, even if this year’s total exceeds $25,000. New and used equipment generally qualifies, but it is imperative that equipment be placed in service prior to December 31, 2015.
Similarly, the “bonus depreciation” tax break has expired but likely will be restored for 2015, judging by Congressional activity. Under this provision, which applies only to new equipment, purchasers can take a 50% first year depreciation deduction, followed by depreciating the balance of the purchase price over several years. Both accelerated deductions (under Section 179) and “bonus” depreciation reduce the cost of capital and increase cash flow for small businesses. As such, these tax breaks can serve as important tools for effective tax planning.