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Year End Tax Planning for Business Capital Expenditures

Year-end tax planning for property and equipment purchases

As we approach the year end, businesses should be evaluating their property and equipment purchases to maximize their 2012 income tax deductions. While Congress continues to negotiate next year’s tax law, we believe it still makes sense to defer taxable income. One common technique to defer income is to maximize this year’s depreciation for any property and equipment purchased and placed in service in 2012. This is critically important because 2013 depreciation deductions will be sharply reduced making it more costly to purchase property and equipment on an after tax basis.

Expensing property and equipment purchases (section 179 election) –

Generally, when a business purchases property & equipment, the cost of the property is depreciated over its income tax life as opposed to expensing it in the year of purchase. Under the section 179 election, if a business acquires less than $560,000 of qualifying property in 2012 they can elect to expense up to $139,000 as opposed to depreciating its cost over the property’s income tax life.  Qualifying property must be tangible personal property that is purchased in 2012 and it can be either new or used property. Buildings and their structural components including leasehold improvements are not eligible for the section 179 deduction.  While computer software is eligible for the section 179 deduction in 2012, after 2012 it is not eligible.

For businesses that acquire more than $560,000 of qualifying property in 2012, the expense is reduced by each dollar of property purchased over $560,000. Accordingly, the 179 election is not available to any business with property purchases greater than $699,000.

For 2013, the 179 election is scheduled to be reduced to $25,000 provided that the business doesn’t purchase more than $200,000 of qualifying property. Therefore, business owners should consider accelerating their plans to purchase property to take advantage of the higher limit before the 2013 limit applies.

Bonus depreciation –

In 2012, any business that purchases property with a tax life less than 20 years will be able to expense 50% of the cost of the property this year. This 50% bonus depreciation is eligible for most property and equipment that is acquired new. The remaining 50% of the property’s cost can be depreciated over the asset’s tax life.

In 2013, bonus depreciation for property and equipment will not be allowed except in rare situations. Therefore, a business owner deciding on purchasing new equipment should accelerate the purchase into 2012. For example, if a business purchases and places in service $500,000 of new 5 year equipment in 2012, then the bonus depreciation is $250,000. The remaining cost is depreciated over 5 years, so the 2012 depreciation is $300,000.  If the same $500,000 of equipment is purchased in 2013 the depreciation expense will only be $100,000.

Cash poor businesses –

For businesses owners that desire to take full advantage of the 179 election and bonus depreciation this year but do not have the available cash, the equipment purchase can be financed over time.

Creating tax losses –

For business that acquires a significant amount of equipment that qualifies for bonus depreciation and the bonus depreciation will create a loss, that tax loss can be carried back two years to recover previous years taxes paid.

State and local tax implications –

In many states including New York, bonus depreciation is not permitted for state and city tax purposes. However, regular depreciation deductions which depreciate that property over its income tax life can be used.

If you have any questions regarding the tax implications for your property & equipment purchases, then please contact Barry Sunshine, CPA or your Janover tax professional at 516-542-6300.


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