Early last month, Congress passed, and the President signed a patch that extended certain tax cuts. One of these tax cuts was IRC § 179. When you buy a piece of equipment over $500, you have to recover the cost over a period of time. This is known as depreciation. For taxes, we use the Modified Accelerated Cost Reduction System (MACRS). For instance, if you buy a computer for $600, you can recover the cost, and expense the computer over a period of five years. With IRC § 179 you can accelerate the depreciation on the computer by $600. So in 2014, if you bought a computer for $600, and you had a profit of at least $600, you can write off the full amount of the computer in 2014, and not have to wait five years.
IRC § 179, or Section 179 works like this. You can write off up to $500,000 in equipment that you purchased in 2014, up to a $2 million investment. The caveat, to being able to write this off is that you have a profit. For instance, if you have a profit of $100,000 and you bought $75,000 worth of equipment, you can write off $75,000, bringing your profit down to $25,000. If you have a profit of $100,000 and you bought $125,000 worth of equipment, you can only take a Section 179 deduction of $100,000 of that equipment, bringing your profit to $0.00. You’re probably asking yourself, what about companies that don’t have a profit? There is a provision for them as well. Companies that cannot use the IRC § 179 deduction, they can use something called 50% bonus depreciation. With 50% bonus depreciation the rules are a little bit different. First of all, the use of the equipment must commence with the taxpayer. If you bought $10,000 worth of equipment and had a profit of $1000, you could use $5000 of the bonus depreciation to bring your profit down to a loss of $4000. Both 50% bonus depreciation and IRC § 179 are two very powerful tax deductions. Now for the bad news. Bonus depreciation goes away entirely in 2015 unless Congress acts. IRC § 179 deduction goes down to $25,000, unless Congress acts.
Because of these two very powerful tax deductions, businesses all over the United States have been expanding very quickly. They have been buying equipment, and using the tax savings to hire people. I know that my clients, have been using these two deductions a lot since 2001 when IRC § 179 was increased to $500,000. Bonus depreciation, has been around since 2008. Bonus depreciation was invented so that businesses would buy more equipment and hire more people. It worked.
As I said earlier, unless Congress acts IRC § 179 will go down to $25,000, and bonus depreciation will go away completely. For the last couple of years, we’ve been working on temporary tax laws that need to be extended every single year. For instance, before early December, IRC § 179 was only $25,000, and there was no bonus depreciation. Do you have any idea how hard it is, to do tax planning when you have no idea whether or not a tax law will be extended? Congress needs to act immediately to make both IRC § 179 and bonus depreciation permanent. We can no longer operate under temporary regulations. Businesses all over the country are trying to plan for taxes. For instance, if I have a client come to me and ask whether they should buy a new piece of equipment and hire somebody to operate it, I have no idea what to tell them. If they do buy that new piece of equipment, they can currently only reduce their tax liability by $25,000. If they’re in the 25% tax bracket that’s only a tax savings of $6250. That’s not enough to hire somebody.
Year after year, were told that true tax reform is coming. Year after year, all they do is patch the current tax code. Including this year.