With two lucrative federal tax incentives on course to expire by the end of this year, CFOs of companies both large and small might do well to buy needed equipment now, a corporate-tax expert advises.
Perhaps the most important tax 2013 “extender” — what mavens call expiring temporary tax provisions — is the 50 percent bonus depreciation enacted as part of economic-stimulus legislation, according to Jeffrey A. Porter, who chairs the tax executive committee of the American Institute of Certified Public Accountants.
“Let’s say you’re a CFO, and you know you need to purchase a million-dollar piece of equipment. If you purchase it before the end of the year, you can get a $600,000 write-off in the first year,” says Porter, the founder and owner of Porter & Associates, a Huntington, West Virginia tax planning and business advisory firm.
In addition to the $500,000 first-year bonus depreciation that the company would get from purchasing the $1 million piece of machinery and then putting it into service before December 31, the company could write off the normal 20 percent of the other $500,000, according to the accountant.
The provision is one of the least likely 2013 business extenders among the 55 expiring business and individual tax breaks to be extended, Porter thinks. “It’s very expensive in terms of tax revenues, and it was primarily there to stimulate the economy. I would think that, at this stage, this would be something [Congress] would be pulling back on,” Porter says, noting that the economy has been doing better since the 50 percent bonus depreciation was extended under the American Taxpayer Relief Act of 2012.
If the provision does expire and a company waits and purchases a needed piece of equipment in the first week of January, it will only be able to get a $200,000 write-off in the first year. “So in terms of [a company's] tax liability, which converts to cash flow, that’s an easy decision,” Porter says. At the same time, the possibility that Congress might, over the course of 2014, want to boost the economy via the bonus-depreciation presents a dilemma for finance chiefs less sure their companies really need to spend more on equipment, says Porter.
The bonus depreciation, which can apply to purchases ranging from software to trucks to mining equipment, places no limits on a company’s asset purchases. Thus it can apply to very large companies as well as smaller ones, he noted.
That’s not the case for another expiring provision, the so-called Section 179 Election, under which companies can choose to recover all or part of the cost of certain qualifying property by deducting the expense in the year the company places the property in service. Companies can choose the deduction instead of recovering the cost by taking the depreciation. But the total a company can deduct is limited. Under the 2013 extender, the amount deducted as an expense in the first year generally can’t exceed $500,000, according to the Internal Revenue Service.
If the cost of a company’s qualifying property or equipment (used as well as new) placed in service in a year is more than $2 million, however, the taxed entity must reduce the $500,000 deduction limit dollar for dollar by the amount of cost over $2 million. “If you’re a GE, a company that’s going to buy millions of dollars of equipment, that’s not going to mean anything. But to smaller companies it means a lot,” says Porter.
In a few more weeks, it will mean a whole lot less. Unless Congress extends the current deduction limit for a Section 179 Election, it will drop from $500,000 to $25,000 on January 1.
About whether to buy equipment now under Section 179 Elections, the accountant offers the same advice he does on bonus depreciations: “If you’re someone that’s contemplating buying [a] $100,000 bulldozer between now and the end of the year, absolutely.”
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