Code Section 179 Expensing
An enhanced Code Sec. 179 expense deduction is available through 2013 to taxpayers (other than estates, trusts or certain noncorporate lessors) that elect to treat the cost of qualifying property (Code Sec. 179 property) as an expense rather than a capital expenditure. The annual dollar limitation on Code Sec. 179 expensing for tax years beginning in 2012 and 2013, as increased by ATRA, is $500,000. Similarly, for tax years beginning in 2012 and 2013, an annual $2 million overall investment limitation applies before the maximum $500,000 deduction must be reduced, dollar-for-dollar, for amounts above that $2 million amount.
IMPACT.
The Code Sec. 179 deduction phases out completely in a tax year beginning in 2013 if the taxpayer places more than $2.5 million of Code Sec. 179 property in service. In contrast, for tax years beginning after 2013, that dollar limit is scheduled to plummet under current law to $25,000 unless otherwise extended by Congress. The phase-out ceiling is also scheduled to drop to $200,000 in 2014 unless otherwise extended by Congress. As a result, purchases of otherwise qualifying property in excess of only $225,000 in 2014 will reduce the Code Sec. 179 deduction to $0.
STRATEGY.
A business could maximize its benefits under Code Sec. 179 by expensing property that does not qualify for bonus depreciation (such as used property) and property with a long modified accelerated cost recovery system (MACRS) depreciation period. For example, given the choice between expensing an item of MACRS five-year property and an item of MACRS 15-year property, the 15-year property should generally be expensed since it takes 10 additional tax years to recover its cost through annual depreciation deductions as opposed to recovery of the cost of the five-year property.
Carry forward. The Code Sec. 179 deduction is also limited to the taxpayer’s taxable income derived from the active conduct of any trade or business during the tax year, computed without taking into account any Code Sec. 179 deduction, deduction for selfemployment taxes, net operating loss carryback or carryover, or deductions suspended under any provision. Any amount disallowed by this limitation may be carried forward and deducted in subsequent tax years, subject to the maximum dollar and investment limitations, or, if lower, the taxable income limitation in effect for the carryover year.
STRATEGY.
Since the maximum dollar limit for 2014 is scheduled to fall to $25,000 (unless the $500,000 amount is extended to at least the same degree by Congress), business should not assume that a carryover will be fully absorbed immediately in 2014. Monitoring 2013 taxable income in 2013 for this purpose therefore is important within an overall Code Sec. 179 strategy.
Qualifying property.Code Sec. 179 property is generally defined as new or used depreciable tangible Code Sec. 1245 property that is purchased for use in the active conduct of a trade or business. Off-the-shelf computer software is also included for 2013 in the definition of qualifying property as is some real property (discussed below).
STRATEGY.
Under current law, off-the-shelf computer software and certain real property will not qualify for Code Sec. 179 expensing after 2013, even at the lower $25,000 ceiling. This makes year-end strategies that take advantage of them in 2013 particularly critical.
Qualified real property. The Code Sec. 179 expensing allowance for qualified real property, is scheduled to expire for property placed in service after 2013. Qualified real property for expensing purposes includes qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.
Code Sec. 179 expensing versus bonus depreciation. Unlike Code Sec. 179 expensing, there is no dollar cap on the amount of bonus depreciation that a business may claim (Bonus depreciation is discussed below). Additionally, Code Sec. 179 property encompasses used property, while bonus depreciation is limited to first-use by the taxpayer.
Bonus depreciation is keyed to a calendar year and generally ends after December 31, 2013. Rules for 2013 Code Sec. 179 expensing, on the other hand, apply for tax years beginning in 2013.
