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In their efforts to stimulate the economy, over the course of the last several years, congress renewed several taxpayer friendly depreciation rules. As a result, the rate at which certain assets were expensed was accelerated notably. However, under current 2014 tax law, the benefits associated with accelerated depreciation from Code Sections 179 and 168(k) have reduced significantly. In fact, in some instances these benefits have been eliminated entirely for the 2014 tax year.
Code Section 179:
The 2013 tax year had the following limitations:
1. A maximum deduction of $500,000, with the total deduction limited to the taxpayer’s taxable income; and
2. If Section 179 property placed in service is greater than $2,000,000, the Section 179 deduction was reduced, dollar for dollar, by the dollar amount placed in service which exceeded $2,000,000.
For the 2014 tax year, without any year end congressional intervention, Code Section 179 depreciation will be reduced to the following:
1. A maximum deduction of $25,000, with the total deduction limited to the taxpayer’s taxable income; and
2. If Section 179 property placed in service is greater than $200,000, the Section 179 deduction will reduced, dollar for dollar, by the dollar amount placed in service which exceeds $200,000.
Additionally, it's important to note that in 2014 Code Section 179 depreciation will no longer be available for qualified real property. Qualified real property in prior years was eligible for section 179 depreciation, subject to certain limitations. Currently this has not been extended.
Code Section 168(k) "Bonus Depreciation":
The other method for accelerating depreciation was through Code Section 168(k) depreciation (or "bonus depreciation"). In 2013, Code Section 168(k) depreciation allowed for an immediate deduction of 50% of the cost of eligible property placed in service during the tax year. In past years, Code Section 168(k) depreciation provided a good alternative to Code Section 179 depreciation, as it contained no dollar limitations and could be taken regardless of a taxpayer's taxable income. Under current 2014 tax law, bonus depreciation expired in 2013 and has not been extended into 2014.
However, tax practitioners have expected bonus depreciation to expire in the past with Congress ultimately extending it at the 11th hour each year. It is difficult to predict the actions of Congress; however it is ultimately essential to be advised of these changes for future business planning purposes.
Please note that these changes related to accelerated depreciation do not impact the ultimate amount of depreciation that can be deducted over the life of the qualifying asset. However under current law, a large portion of the deduction must be deferred to future years. This reduces the immediate benefit of accelerating the depreciation, but the total benefit remains the same over the life of the asset.
Still curious to learn more about the 2014 depreciation changes? Our team at Delap is happy to answer any questions you have regarding this specific tax update, or any other accounting and finance challenges you may be facing.
Reach out today!