Year-End Business Tax Planning

As usual, the Section 179 “expensing” deduction is set for a drastic reduction. And, as usual, business owners probably can make year-end plans for equipment purchases with the expectation that a higher deduction amount for 2015 will be enacted.

Typically, purchases of business equipment are depreciated over several years, so the amount you spend can be deducted gradually from business income. However, the tax code allows some purchases to be deducted in full right away.

Example: Brett Benson spends $20,000 on equipment for his manufacturing company this year. Brett can expense (deduct) that $20,000 to get an immediate tax benefit, rather than spread the tax savings over several years. Generally, an immediate tax savings is more valuable than a future tax savings.

By the numbers

For the expensing deduction, two numbers are critical. One is the maximum amount you’re allowed to deduct. The other is the phaseout amount: the amount of equipment you can purchase before losing the expensing benefit. The phaseout provision essentially restricts this tax break to small and mid-sized companies because giant firms buy so much equipment that they lose the ability to expense any equipment outlays.

The tax code currently calls for the expensing deduction to be capped at $25,000, with a dollar-for-dollar phaseout beginning at $200,000. Thus, if your company buys $210,000 worth of equipment, the excess $10,000 reduces the expensing limit from $25,000 to $15,000.

In truth, those $25,000 and $200,000 numbers are not realistic today. Congress has repeatedly passed tax laws with higher limits: In recent years, expensing up to $500,000 worth of equipment has been permitted, with a phaseout starting at $2 million of annual purchases. All signs point to a repeat performance for 2015. Both Houses of Congress already have indicated willingness to extend some expired tax breaks, including the $500,000 and $2 million limits for expensing business purchases.

Therefore, you should go ahead with purchases of equipment that truly will help your company become more productive, even if this year’s total tops $25,000. New and used equipment will qualify. Make sure to have equipment placed in service by year end, in order to get a deduction for 2015.

Similarly, the “bonus depreciation” tax break has expired but likely will be restored for 2015, judging by Congressional activity. Under this provision, which applies only to new equipment, purchasers can take a 50% first year depreciation deduction, followed by depreciating the balance of the purchase price over several years. Both expensing and bonus depreciation tax breaks reduce the cost of capital and increase cash flow for small companies, so you should consider their impact when planning equipment purchases.