As we approach the end of the year, tax planning takes on an ever more significant tone in the months ahead. In particular 2012 is a challenging year to plan for due to the major uncertainty revolving around 2013 tax rates and rules. However, we feel the best course of action is to be prepared to “pull the trigger” on any plans by year end should it make sense from both an economic and tax point of view. To that end, in this article we will explore two of the major tax breaks for self-employed individuals or business owners that are currently set to expire at the end of this year.
Currently Congress has laws in place permitting us to deduct up to 50% of the cost of qualifying property with Code Section 168(k), also referred to as “Bonus Depreciaton”. This deduction is permitted for all fixed assets placed in service before December 31, 2012. Unlike Section 179 expense, which we will discuss next, there are no income, AGI or other limits on Bonus Depreciation. This deduction is available to all size businesses, for most assets that do not have other limitations in place (such as automobiles which have separate limitations) and can even be used to create a loss that can be carried back to prior tax years! Bonus Depreciation is available for AMT as well as regular tax and it can lead to significant write offs for large purchases. Accelerating planned 2013 fixed asset purchases into 2012 may create large tax breaks that will reduce your 2012 tax liability. As with any depreciation, it is important to note that Fixed Assets must be placed in service prior to December 31. Mere purchase, receipt or delivery of the asset does not qualify and the asset will not be able to be depreciated until it is placed in service. Unfortunately, California and many other states do not conform to Bonus Depreciation.
Section 179 Expense
Section 179 Expense has been a useful tool for many years for small business owners and self-employed individuals to expense the full amount of fixed asset purchases on qualifying assets. Section 179 has always had its limitations, namely a limitation on the amount of expense per year as well as a general limitation on the amount of fixed assets that can be placed in service during the tax year. For the past several years Congress has passed temporary increases in these limitations, thus making Section 179 a very effective tool to reduce tax liability. Unlike Bonus Depreciation, Section 179 cannot be used to create or increase a loss. Instead, any unused Section 179 expense will carry forward to the following tax year. Under current law, Section 179 expense limitations are set to reduce from the current generous amounts of $139,000 of current expense and a limitation on total assets placed in service of $699,000. With no changes in current law, these limitations are set to plummet to $25,000 of current expense on less than $200,000 of assets placed in service during the year. California never conformed to the increased Section 179 expense limitations; unless Congress acts, federal and California law will once again be in conformity starting January 1, 2013.
The Bottom Line
2013 law is currently uncertain but as a savvy business owner you should be prepared to “pull the trigger” on any fixed asset purchases before year end, as well as place these assets in service prior to year end. Fortunately, the decision on which types of depreciation or expense to take is one of the few “after the fact” decisions we can make when it comes to tax planning. However, the actual asset purchase is not. Being prepared is the key to maximizing tax efficiency, cash flow, and ultimately the success of your business. If you have any questions regarding Bonus Depreciation or Section 179 expense contact your LMGW advisor at once.