Question: I have my eye on a machine for my business that is on sale for $40,000. Are there tax benefits to buying it before year end?
Answer: Businesses should certainly consider making purchases of depreciable equipment and machinery this year rather than next, since there are special tax incentives in effect now that may end or be substantially reduced next year.
In particular, businesses can currently take advantage of "Section 179 expensing" and "bonus depreciation." Section 179 expensing allows you to elect to treat the cost of qualifying property (like business equipment, machines, computers and certain vehicles) that would ordinarily be capitalized as a deductible expense instead. This means that you could deduct the entire $40,000 you spent on the machine in 2013, which if you are in the 39.6 percent tax bracket, means your purchase would reduce your federal income tax bill by $15,840. This is a significant savings over the general rule that would require you to capitalize the expense and allow you to take only a half-year's worth of depreciation.
Section 179 expensing will still be allowed next year, but the allowable amounts are scheduled to be much lower. The annual limit for property that can be expensed this way is $500,000 in 2013; and the amount of business property that you can buy and place in service before the section 179 expensing benefit begins to phase out is $2 million. These limits will plummet to $25,000 and $200,000, respectively, in 2014. So, that same qualifying $40,000 purchase in January will yield a deduction of only $9,900.Section 179 expensing cannot reduce your taxable income below zero, but amounts unused due to this limitation can be carried forward indefinitely, reducing future years' taxable income by up to $25,000 per year.
Another tax incentive potentially applicable to your purchase is bonus depreciation. The bonus depreciation rule allows taxpayers to take a depreciation deduction equal to 50 percent of the cost of qualifying property in the year the property is placed in service. Unlike Section 179 expensing, bonus depreciation cannot be taken for used property. There is no dollar limit on the amount of bonus depreciation that you can take in a year.
Bonus depreciation is set to expire entirely at the end of this year. Although bonus depreciation and section 179 expensing could be revived by a budget deal, there is certainly no guarantee such a deal will be made.
Catherine Hines can be reached at email@example.com.
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