Year End Tax Planning for Entities

By Ryan Bowman

In recent years, end-of-the-year tax planning for businesses has been complicated by uncertainty over the future availability of many tax incentives. This year is no different. In January, Congress extended many business tax incentives for 2013. Now, those incentives have expired. Whether they will be extended beyond 2013 is unclear. Taxpayers need to be aware of the expiring provisions and explore developing a tax strategy that takes into account various scenarios for the future of these incentives.

Code Section 179 Expensing

Code Sec. 179 gives businesses the option of claiming a deduction for the cost of qualified property all in its first year of use rather than claiming depreciation over a period of years. On December 31, 2013 Code Sec. 179 limitation of $500,000 with a $2,000,000 investment ceiling expired. The Code Sec. 179 dollar limit is scheduled to drop to $25,000 for 2014 with a $200,000 investment ceiling. In 2014 the Code Sec. 179 limit of $25,000 is reduced dollar for dollar to the extent that a taxpayer’s total Code Sec. property exceeds $200,000. If a taxpayer purchases qualifying property, such as machinery and equipment, that exceeds $225,000 the taxpayer will be forced to depreciate the item over MACRS (modified accelerated cost recovery system) and the cost recovery would be spread over multiple years.

Bonus Depreciation

The 50% first-year bonus depreciation deduction has expired after 2013. Unlike the Section 179 expense deduction, the bonus depreciation deduction is not limited to smaller companies or capped at a certain dollar level. This means that some of the large first year deductions for qualifying property will be depreciated using MACRS. Bonus depreciation allowed a large first year deduction in the year an asset is placed in service, however these assets being depreciated using MACRS will depreciate an asset on a slower pace.

Planning

Code Sec. 179 and bonus depreciation have been the most popular tax savings provisions in the past and the uncertainty of their existence for tax year 2014 makes planning very challenging.

Please contact our office for more details on developing a tax strategy in uncertain times that includes consideration of certain tax-advantaged steps that may be taken before year-end 2014.