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 such as computers, business equipment and machinery, and office furniture. On January 1, 2013, the rules for 2013 were set and the limits for 2012 were retroactively changed.
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. 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 means that, if, for example, you purchased $250,000 of property that qualifies for Section 179 treatment in 2012, you may deduct the entire amount in 2012, instead of just $128,000. If you purchase more than $2 million of equipment in any one year, then the amount you can deduct is reduced dollar for dollar.
The $500,000 Section 179 limit is scheduled to last until the end of 2013. In 2014, the Section 179 limit is scheduled to go to $25,000.
In addition to Section 179 expensing, or as an alternative to it, you may use bonus deprecation to currently deduct the cost of long-term business property. For 2012 and 2013, bonus depreciation is set at 50%--that is, you may deduct 50% of the cost of property that qualifies 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.