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Purchasing Equipment? Beware Generous Depreciation Incentives Have Expired


Over the past several years, contractors generated significant tax deductions through bonus depreciation and Section 179 first year expensing.  For assets placed in service during the calendar year 2013, taxpayers could claim 50% bonus depreciation.  However, this incentive has expired as there is no bonus depreciation allowable for original use property placed in service during 2014.

For eligible property placed in service during tax years beginning in 2013, the maximum Section 179 deduction on equipment was $500,000.  In contrast, the Section 179 deduction for assets placed in service for tax years beginning in 2014 will revert to $25,000 per year (adjusted for inflation).

While we may see mid or even late 2014 legislation retroactively extending the more generous pre-2014 depreciation incentives, contractors should prepare for the strong possibility that their federal depreciation will be limited for 2014.  Major equipment purchase have historically served as a prominent tax planning idea for contractors as most, if not all, of the value of the equipment could be deducted in the year the asset was placed in service.  In contrast, for financial statement purposes, book depreciation could be expensed over several years.  This created low taxable income in the year the asset was placed in service while not causing an adverse effect on the financial statements.

As a reminder, the ability to claim bonus depreciation or Section 179 expense is subject to certain limitations.  In the case of bonus depreciation, the property must be original use, but income and total capital purchase limitations do not apply.  For section 179, taxpayers are limited to $200,000 total capital purchases in 2014 before the deduction begins to phase out.  In addition, business income limitations apply.