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New Section 179 Limit is Bad News for Business Owners

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New Section 179 Limits is Bad News for Business Owners

Section 179 is a rule in the Internal Revenue Code that allows Business Owners to recover the cost of qualifying depreciable property, up to a limit, by deducting it in the year the property was placed in service. Section 179 is much appreciated by Business Owners because they could elect to depreciate large business purchases in the year of purchase instead of waiting between 5 -39 years to recover the cost through general depreciation methods.

In 2013, the maximum deduction a taxpayer can take under section 179 is $500,000 with the Maximum deduction per piece of property being $250,000. Section 179 of the Internal Revenue Code calls for a phase-out of the Business property has a cost basis of over $2,000,000 with a complete phase-out when the property placed in service has a cost basis of over $2,500,000. In 2013, the IRS allows taxpayers to amend or permanently revoke a section 179 election.

In order to be eligible for Section 179, the property placed in service must be Tangible Personal Property (except buildings and their structural components) such as machinery and equipment, property contained in or attached to a building (refrigerators, counters, printers, ect.), gasoline storage tanks and pumps and livestock. 

For many years, taxpayers have utilized the section 179 deduction to the best of their benefits. Assume a Business Owner purchased Office furniture for $100,000 with no disposable value. Under the IRS MACRS Depreciation, the Business Owner must depreciate the furniture over 10 years, amounting to $10,000 per year. Assuming the Business Owner had a pre-depreciation taxable income of $150,000, after normal MACRS depreciation the Business Owner would be taxed on $140,000. Had he used the Section 179 depreciation, he would only be taxed on $50,000 – a huge difference.

Unless new regulations are put in place, starting in 2014 the new limitation under section 179 will be $25,000 per year, a 95% decrease from 2013. Additionally, the maximum cost basis of qualifying property must not exceed $200,000. Using the same scenario explained above, in 2014 if the Business Owner utilize the same method, his taxable income can only fall to a minimum of $130,000.

The new rules under section 179 are scheduled to be implemented on 1/1/2014. If there are any major purchases that your business is planning on making soon, now may be the best chance to do it.





Category: Tax


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