An expanding and strengthening economy may mean the end of the line on Dec. 31, 2013, for some stimulus-type tax breaks. The overall Code Sec. 179 expensing limit is slated for a drastic reduction next year. Thus, enterprises planning to purchase machinery, vehicles, equipment or invest in eligible real estate assets during the remainder of this year or early next year should try to accelerate their buying plans, if doing so makes sound business sense.
Under Tax Code Sec. 179, a taxpayer, other than an estate, trust, and certain non-corporate lessors, can elect to deduct as an expense, rather than to depreciate, up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in the taxpayer’s trade or business. The maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of Code Sec. 179 property placed in service during the tax year in excess of a specified investment ceiling. The amount eligible to be expensed for a tax year can’t exceed the taxable income derived from the taxpayer’s active conduct of a trade or business. Any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding tax years.
For tax years beginning in 2013: (1) the dollar limitation on the expensing deduction is $500,000; and (2) the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $2,000,000.
For tax years beginning after 2013, the maximum expensing limit is scheduled to drop to $25,000.
Congress isn’t likely to allow the expensing limit and investment ceiling limit to drop this drastically, but it could well legislate a reduction in today’s generous limits.
There is no pro rata reduction of the Code Sec. 179 expensing deduction depending on the portion of the year the asset is held. If the deduction is allowable, the amount that may be expensed is the same regardless of when the property is acquired during the year.
The fact that the expensing deduction may be claimed in full (if the taxpayer is otherwise eligible to take it) regardless of how long the property is held during the year can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of a tax year, rather than at the beginning of the following year, can result in a full expensing deduction for the earlier year.
Where possible, taxpayers should factor the annual expensing limits for 2013 and the possible drop in these limits for 2014 into their annual equipment-purchase plans.
Taxable income limit. The Code Sec. 179 expensing deduction is limited to taxable income from any of the taxpayer’s active trades or businesses .This means that the taxable income limit doesn’t bar an expense deduction just because the particular business in which the property is used doesn’t produce any net income. So long as the taxpayer has aggregate net income from all his trades or businesses, the deduction is allowed.
Taxpayers should consider making the expensing election even in a year where a less-than-full tax benefit is derived from the election because of the taxable income limit. This way, the right to carry the expensing deduction forward to other years will be preserved.
Employees who run a sideline business may be able to reduce their 2013 tax bill by buying business equipment they need before the end of this year rather than in 2014.
Bottom line, if you want to get a HUGE tax deduction on THIS YEAR’S return, you need to buy a full-size truck or SUV before the end of the year. The vehicles must have a 6000 pound gross vehicle weight rating. For 2013 & 2014 models, these vehicles qualify:
Audi Q7, BMW X5 and X6, Buick Enclave, Cadillac Escalade, Chevy Avalanche, Chevy Express vans, Chevy Silverado 1500 and larger, Chevy Tahoe, Chevy Suburban, Chevy Traverse, Dodge Durango, Ford Econoline, Ford Explorer, Ford Expedition, Ford F150 and larger trucks, Ford Flex, GMC Acadia, GMC Savana vans, GMC Sierra 1500 and larger pickups, GMC Yukon, Honda Pilot 4-wheel drive, Honda Ridgeline, Infiniti QX56, Jeep Grand Cherokee, Land Rover LR4, HSE, and Sport, Lexus GX460, LX570, Lincoln MKT and Navigator, Mercedes Benz G550, GL350 diesel, ML350, Nissan Armada, NVP, and Titan, Porsche Cayenne, Toyota Tundra, 4Runner, Land Cruiser, Sequoia, VW Touareg hybrid, Volvo XC90.