Finding Opportunities in New Depreciation Limits
The ability to expense assets on an accelerated basis through Bonus Depreciation and the Section 179 deduction has made purchasing equipment an attractive alternative for businesses over the past several years.
But as 2013 came to an end, so too did the ability to use the Bonus Depreciation expensing option. Additionally, the Section 179 expensing limits decreased to levels not seen in more than a decade, and Congress doesn’t appear interested in making changes any time soon, if at all.
As a result, the Section 179 expensing deduction for 2014 is limited to an annual maximum of $25,000. More significantly, the Section 179 deduction limit is reduced dollar-for-dollar once the amount of qualifying property placed in service during the year exceeds $200,000.
Accordingly, the 179 deduction is completely eliminated once the property purchased during the year exceeds $225,000.
Running the Numbers
For example, assume that a company places three trucks — each with a GVWR exceeding 6,000 pounds and costing $25,000 apiece — into service in 2014 for a total cost of $75,000.
If this is the only qualifying property purchased during the year, then a $25,000 Section 179 deduction would be allowed on the tax return for 2014. (The same math holds true for a single vehicle such as a $60,000 delivery truck.)
If the company purchases equipment totaling $210,000 during 2014, then the maximum Section 179 deduction would only be $15,000 ($210,000 - $200,000 = $10,000 reduction; $25,000 limit – $10,000 reduction = $15,000 allowable Section 179 deduction).
Keep in mind that once the amount of qualifying equipment purchased exceeds $225,000, the Section 179 deduction is eliminated.
The Lease Option
With these expensing limits in place, leasing becomes a more attractive option for acquiring business property. The business can simply expense the monthly payments to the extent the vehicles are used for business, much like expensing office lease payments.
Understand that the Section 179 deduction cannot be used to create a tax loss for a business. Any loss not utilized in the current year may be carried over to the next year, but it may be used only when there is a profit.
Deducting lease payments does not have a similar limitation. The amount of payments may be expensed in full regardless of the profitability on the tax return — subject to the amount of business use discussed previously.
Financing your business equipment requires careful planning and the advice of your professional tax adviser. But with a potentially lower initial cash outlay and an unrestricted ability to deduct lease payments, leasing may become the more favorable choice.