Looming Change to Section 179 Expensing Amounts

Under current tax law, certain purchases of new or used property may be “expensed” for income tax purposes under Section 179 of the tax code, in the year of purchase, instead of being depreciated over a number of years.  The amount that taxpayers can expense is currently $500,000 for tax years beginning in 2013.  After 2013 the amount drops to $25,000.  The expensing limit is reduced dollar for dollar as total eligible Section 179 property purchases during the year exceed $2 million.  After 2014 the beginning of the phase-out starts at only $200,000. 

In addition to changes in these limits, the provisions permitting Section 179 to apply to the cost of qualified leasehold improvements, qualified restaurant improvements, new restaurant buildings, qualified retail improvements, and to off-the-shelf computer software will no longer apply in years beginning after 2013. 

While considering year-end business tax planning, you should take note of these changes.  There is a chance that Congress will restore the higher limits for years after 2013, but nothing is certain about what Congress will do. 

Fiscal-year partnerships, limited liability companies, and S corporations (known as “pass-through entities” because their owners pay the tax on company profits) should be careful of a potential trap that could waste part of their Section 179 expensing election.  For fiscal years beginning in 2013, the full amount of the expensing limits is available.  However, since Section 179 deductions of pass-through entities are allocated to owners in the calendar year in which the fiscal year ends (by Schedule K-1), the owners must contend with 2014 limitations.  For example, assume an S corporation whose fiscal year starts November 1, 2013, elects to expense $200,000 of equipment under Section 179.  Assume further that the S corporation is owned by two 50% owners.  The tax result is that only $50,000 of the $200,000 expense is deductible ($25,000 for each owner).  The excess $150,000 is lost!  In this case, the S corporation should wait to make the Section 179 election on its tax return until it learns of any potential tax law extensions.  If the law isn’t extended, then the S corporation should elect to expense only $50,000 and depreciate the balance of the cost to avoid wasting any deductions.