The conclusion of 2013 also brought the end of 55 tax breaks, many of which relate to your small business.
Congress can still renew any or all of these breaks (and even make them retroactive), but it’s likely that Congress will want to see how the economy reacts to this year’s events before considering that action. Many experts expect decisions on renewing tax breaks to come during fourth quarter 2014.
One of the biggest tax planning tools that expired is the Section 179 deduction. This code section allows for a business to expense the purchase of capital assets such as machinery, equipment, furniture, vehicles and fixtures to name a few, in the year of purchase rather than depreciate them over their useful lives. The American Taxpayer Relief Act of 2012 (ATRA ’12) extended the $500,000 expense limit and the $2 million threshold retroactively to include tax years beginning in 2012 and 2013. This means that you were limited to $2 million in purchases (after that, the amount you can expense phases out) and expense $500,000 of those purchases.
The Section 179 deduction brings significant tax savings for small business by reducing their tax liabilities. This deduction is available to independent contractors, sole proprietors, partnerships and corporations. It applies to the purchase of new or used assets. It is also limited to the amount of trade or business income. Any excess may be carried forward to the subsequent tax year.
Check with your state taxing agency to see if it conforms to federal law regarding the expensing limits and purchase thresholds of Section 179. Some states limit the write-off. For example, California has never allowed more than $2,000 expensing of capital assets for C corporations and $25,000 for other entities with a $200,000 qualified asset placed-in-service threshold. The remainder of purchases must be depreciated.
When this provision expired at the end of 2013, it reverted back to 1986 tax law when the deduction was first introduced. This means that if Congress doesn’t take action, for 2014 and later years, the total amount that a business can expense via Section 179 will be $25,000.
A tax provision for bonus depreciation also expired on Dec. 31, 2013. Bonus depreciation came into effect in 2008 and allows a business owner to write off 50% of the cost of capital assets. Bonus depreciation applies only to the purchase of new capital assets. Used items must be depreciated over their useful lives or expensed through Section 179.
When using bonus depreciation, there is no limit as to the amount of money the business can spend on capital asset purchases. And if the use of bonus depreciation creates a loss for the business, you are entitled to enjoy it against other income.
Since these are two of the most popular tax reduction provisions available to small business, tax planning will therefore be a challenge during 2014. My best advice is to plan according to your company’s needs, save for capital asset purchases, and see what happens at year end. Check with your tax professional sometime during the summer to see which way the winds are blowing and to see what other tax planning steps can be taken to minimize your tax liability in the event these provisions are not renewed.
Bonnie Lee is an enrolled agent admitted to practice and representing taxpayers in all 50 states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, Calif., and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Her new e-book Taxpertise for the Creative Mind Murder, Mayem, Romance, Comedy and Tax Tips for Artists of all Kinds is available at all major booksellers. Follow Bonnie Lee on Twitter and on Facebook.