Depreciation

The end of 2013 brought a significant reduction in a key tax break small businesses regularly utilize, relating to the section 179 accelerated depreciation deduction. This deduction allows companies to expense the cost of capital assets purchased in the current year instead of having to depreciate them over their useful lives. This deduction has been reduced to $25,000 per year for tax years beginning in 2014, a reduction of $475,000 from the previous limit of $500,000 that was available for tax years starting in 2013. Congress may reinstate the old limit or raise the current one before year's end, but currently the limit is set at $25,000.

The deduction for bonus depreciation was also eliminated as of December 31, 2013. Bonus depreciation allowed taxpayers to deduct 50% of the purchase price on new capital assets through depreciation. Again, Congress may reinstate or increase the current depreciation rules but, for now, we should assume this won't happen and plan accordingly.

Repairs

The IRS also finalized the rules for repairs vs. capital improvements in 2013. The final rules, effective January 1, 2014, include a valuable provision for many taxpayers, particularly small businesses. The IRS listened to concerns and created a proposed safe harbor that's even more taxpayer-friendly. The goal of the final repair regulations is to bring a level of certainty to the treatment of costs meant for the acquisition, production, and/or improvement of tangible property. The regulations generally require a taxpayer to capitalize amounts paid to acquire or produce a unit of real or personal property, including related transaction costs. However, taxpayers can take advantage of a de minimis safe harbor, which is much more expansive and generous than in the proposed regulations. To capitalize on the safe harbor, a taxpayer must have written accounting procedures in place at the start of the tax year that treat amounts paid for property costing less than a certain dollar amount ($500 for taxpayers without an audited financial statement), or items having an economically useful life of twelve months or less, as expenses. The safe harbor must be elected annually; taxpayers with audited financial statements may use a $5,000 de minimis amount. The final regulations authorize the IRS to increase the $5,000/$500 de minimis amounts in future years. As always, we'll keep you posted of any future developments that may affect you. Please feel free to call us with any questions.