For the past several years taxpayers have received a gift from Congress in the form of accelerated depreciation. In 2011 as well as part of 2010, taxpayers could write off the entire cost of fixed asset purchases through “bonus” depreciation as long as the taxpayer was the original user of these assets. In addition, many small businesses could take advantage of Section 179 to write off up to $500,000 of assets (either new or used) in 2010 and 2011. In prior years these accelerated write offs were also available, albeit at lower levels.
In 2012 taxpayers continue to benefit from accelerated depreciation at lower levels. They will only be able to write off 50% of original use assets through “bonus” depreciation, and the maximum Section 179 deduction will be $139,000.
If tax law remains unchanged, taxpayers in capital intensive businesses could receive a surprise for the 2013 tax year. The maximum Section 179 deduction will be $25,000 and there will be no “bonus” depreciation.
Because taxpayers have likely written off most the cost of assets placed in service in recent years, there will probably be little tax depreciation remaining for these assets in 2013. Add to this the lower amount of accelerated depreciation from 2013 purchases, and the taxpayer could be deducting a significantly lower amount of depreciation compared to recent years.
For example, assume a taxpayer purchased $500,000 of new equipment each year from 2009 through 2013. Further assume that this is property which would normally be depreciated over 7 years for tax purposes. For 2009-2011 this taxpayer could use a combination of bonus depreciation and Section 179 to write off the entire cost of this property. In 2012 the taxpayer could write off $250,000 through bonus depreciation, $139,000 utilizing Section 179, and an additional $15,857 through normal depreciation. The total 2012 write off would be $404,857. In 2013 the taxpayer would not be allowed bonus deprecitiation or Section 179 (because the ability to use Section 179 phases out in 2013 once purchases exceed $200,000). Therefore, only the normal depreciation of $71,428 would be available to the taxpayer on 2013 asset purchases.
Add to this the fact that tax rates are currently scheduled to increase in 2013, and this taxpayer could be facing a significantly higher tax bill than they have had in recent years if all other activity is unchanged. In addition, taxpayers who financed the prior year purchases will still be paying on the loans, but not receiving the depreciation deduction.
Taxpayers who have benefited from recent favorable depreciation rules should be planning now for this change. Congress could extend the benefits to 2013, but with an election year upon us no changes are likely to happen soon. The results of the election will help determine the tax depreciation rules for 2013 and beyond.
Taxpayers should consult with their advisors now, and follow up throughout the year, to determine how these changes affect them.
Mike Hawkins specializes in minimizing tax and maximizing wealth for closely held companies and their owners. He has vast experience in planning for partnerships, S Corporations, C Corporations, Limited Liability Companies, and sole proprietorships.