Perhaps the single most coveted deduction favored by small business owners is the Section 179 deduction. This deduction permits small businesses the option to expense, rather than depreciate, the cost of tangible personal property purchased in the immediate tax year. In the preceding 2012 and 2013 tax years, the maximum Section 179 deduction available was $500,000, subject to certain limitations. For instance, your client owns an engineering practice, and this practice purchases computer equipment during the year totaling $100,000. In 2012 and 2013, your client had the option to expense any amount up to $100,000 of these purchases (and anything not taken by Section 179 was available for normal tax depreciation). It is a great tax planning tool, and one used by most tax advisors as a lynchpin for tax planning.
So, at $500,000, most small business owners feel pretty comfortable that they have a very special tool in the tax toolbox that works for them each and every year. Right?
At midnight on December 31, 2013, the legislation promulgating the annual Section 179 deduction of $500,000 expired. OK, no big deal. So, what’s the new limit? Try $25,000. Not a misprint folks. Beginning January 1, 2014, the much-beloved Section 179 deduction went from $500,000 down to a measly $25,000.
Most of the publications I read immediately began predicting legislation would be passed early in 2014 reinstating the deduction back to its $500,000 perch. Tick tock. On June 12, 2014, the U.S. House passed a number of tax extenders, one of which was the expired Section 179 provision allowing businesses to expense qualified capital purchases up to as much as $500,000. Cool! Now, we’re able to tax plan with our clients and we have the reinforced windfall of the larger 179 deduction in our toolbox again. Well, I wouldn’t run out and proclaim this revelation to your clients just yet.
You do recall that there are two chambers in the legislative branch of our federal government? Yes? Well, the U.S. Senate has made it abundantly clear that, while the House may have passed the legislation, the Senate would not bring this legislation to the Senate floor for a vote until after the mid-term elections. Yes, mid-November. Now, I don’t know about you, but the vast majority of the tax planning we do for any of our clients has been completed and executed by mid-November. Sure, there are always year end moves, but let’s face it, significant asset purchases must be planned both thoughtfully and strategically. After all, short of extreme circumstances, it is not wise to advise a client to run out and buy a bunch of assets to generate a 179 deduction.
Even now, the vast majority of accounting and tax publications are predicting with great abandon that the Senate will pass the House legislation increasing the Section 179 levels back to the 2013 levels of $500,000. OK, good, that makes me feel better.
So, now the money question: which one of you is going out on the limb of advising your clients that the Section 179 deduction is going to be $500,000 for 2014? OK, and when your client asks you what authority you’re basing this advice on, you’re going to say, “I have confidence that the U.S. Senate will do the right thing and pass the House legislation in mid-November.” Really?
This is not a political piece, so I won’t even get into the issues revolving around those parsing our tax legislation, but I can tell you this, our firm is not, under any circumstance, going to advise our clients to count on a Section 179 deduction any greater than $25,000 at this point.
Sure, either way, it’s a gamble, but if your client spends $500,000 on assets that he or she now has to depreciate as opposed to expense, I can guarantee you the least of your worries will be an enraged client.
Stay tuned !
Author’s note: If you’re interested in reading more regarding the Section 179 deduction, qualifying businesses, limitations, etc., a great resource is the website for Section179.org.