Normally, when a business acquires an asset, it must be capitalized and depreciated over its useful life. However, tax law includes some provisions that allow the entire asset or some portion of it to be written in the first year it is placed in service, providing the opportunity for very large first-year write-offs. The following is a summary of those provisions.
Section 179 Expensing – Code Section 179 allows taxpayers to elect to treat the cost of Section 179 property as an expense deduction for the tax year in which the Section 179 property is placed in service, instead of having to capitalize the expense and recover the cost over several years. Generally, Section 179 property is acquired by purchase for use in the active conduct of a trade or business, and is generally tangible property to which accelerated cost recovery applies. The property must be used more than 50% for business.
The Sec 179 expense deduction was increased for tax years 2010 through 2013 so that a taxpayer can expense up to $500,000 of qualifying property, which includes machinery and equipment. For 2010 through 2013, the annual expensing limit is reduced by the cost of qualifying property that is placed into service during the year that exceeds a $2 million investment limit. The maximum Sec 179 deduction is scheduled to revert to $25,000 for qualifying property placed in service after 2013, and the investment limit cap will be $200,000.
Off-the-Shelf Computer Software – Off-the-shelf computer software placed in service 2003 through 2013 is property eligible for Sec 179 expensing.
Certain Real Property Can Also Be Expensed – Certain real property is also eligible for Sec 179 expensing. For property placed in service in any tax year beginning in 2010 through 2013, the up-to-$500,000 deduction of property expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).
Bonus Depreciation – For qualifying assets purchased and placed in service in 2012 and 2013, trades or businesses are allowed to depreciate an additional 50% of the cost of the assets.
Please call if you would like to discuss how these tax benefits apply to your business situation.