One reason taxes can be so confusing is because the rules are constantly changing. A good case in point: the rules for deducting property you buy for your business under Section 179 of the Internal Revenue Code. This deduction covers business property such as computers, business equipment and machinery, and office furniture.
Recently, the Section 179 limits on how much a business can deduct in one year were set by Congress after the start of the tax year, creating uncertainty for business owners who rely on this valuable deduction. For example, in December of 2014, Congress approved legislation extending the $500,000 Section 179 limit for the 2014 tax year. If Congress had not acted, the Section 179 limit for 2014 would have been automatically reduced to $25,000.
Here's some background on how the Section 179 deduction works.
There are two ways a small business can deduct all or most of the cost of business property in a single year, rather than depreciating it over several years:
- first year expensing using Section 179 of the Internal Revenue Code,
- bonus depreciation.
Under Section 179, you can deduct in a single year the cost of all tangible personal property (new or used) that you buy and use in your business at least 51% of the time. However, there is an annual dollar limit on this deduction. Over the last several years the annual limit has been going up and down like a yoyo.
In 2007, the Section 179 limit was $128,000. In an effort to prevent an economic downturn, the limit was increased to a whopping $250,000 in 2008 and 2009. The limit was increased again to $500,000 for 2010 through 2011. Then at the start of 2012, the annual Section 179 limit was $128,000. However, as part of the fiscal cliff tax deal passed by Congress on January 1, 2013, the limit for 2012 was retroactively increased to $500,000. This meant that, if, for example, you purchased $250,000 of property that qualified for Section 179 treatment in 2012, you could deduct the entire amount in 2012, instead of just $128,000. The annual threshold amount has been kept at $500,000 for tax years 2012, 2013, and 2014.
There is also an annual cap on the amount you can spend on equipment and still get the full deduction. For tax years 2014, 2013, and 2012, the annual investment limit has been $2 million (with a $500,000 annual threshold). This means if you purchase more than $2 million of equipment in any one year, the amount you can deduct is reduced dollar for dollar.
In addition to Section 179 expensing, or as an alternative to it, bonus deprecation can be used to currently deduct the cost of long-term business property. For 2014, 2013, and 2012, bonus depreciation was set at 50%--that is, you could deduct 50% of the cost of property that qualified in a single year. Unlike the case with Section 179, there is no annual dollar limit on bonus depreciation and you need not use the property at least 51% of the time for business.