Time is technically running out for manufacturers to write off sizable sums for equipment purchased in 2013 as a tax rule hangs between its Dec. 31 expiration date and congressional action on the matter.
“I don’t think it’s ever been so hard to know at the end of one year what the laws are going to be in the following year,” said Al Talarczyk, an attorney, CPA and tax instructor at University of Wisconsin Law School.
The rule in question, Section 179, has been through many incarnations. The most recent was part of the American Taxpayer Relief Act for 2013. Section 179 includes a deduction that can be applied to the full price of most new and used capital equipment and some software items. The maximum deduction for the cost of new and used assets placed in service during 2013 is $500,000. A 50 percent bonus depreciation deduction is also available, but only for new equipment. Section 179 is generally deducted first, followed by bonus depreciation.
There are two rules that can further limit the amount deductible under Section 179.
The first rule reduces the possible deduction on a dollar-for-dollar basis for the amount of the cost of the property placed in service in excess of $2 million dollars. For example, if you put $2.1 million of property in service in 2013, the $100,000 excess would reduce the maximum deduction under Section 179 of $500,000 by $100,000 to $400,000.
The second rule states the deduction also cannot exceed the taxable income from the business computed before Section 179 is applied. Without an extension, the Section 179 maximum deduction limit is set to drop to from $500,000 to $25,000 in 2014, and the dollar-for-dollar reduction rule discussed above would be an amount of $200,000 rather than $2 million.