Time is Running Out! Substantial Changes to Accelerated Depreciation Rules in 2014

Adam Aucoin, Tax Senior Manager
November 2013

Taxpayers have benefited from the use of accelerated depreciation for the better part of the past decade. This benefit will significantly decrease in 2014 as many of the rules related to the two methods of accelerated depreciation (Bonus depreciation and Section 179) will be revised.

Section 179 depreciation will be greatly limited after 2013. For 2013 the Section 179 deduction is subject to three limitations:

  1. A maximum deduction of $500,000;
  2. The total deduction is limited to the taxpayer’s taxable income from the active conduct of trade or business; and
  3. If Section 179 property placed in service is greater than $2,000,000 the Section 179 deduction is reduced dollar for dollar by the amount exceeding $2,000,000.

Section 179 property is tangible personal property (such as machinery and equipment), qualified real property, or computer software that is acquired for use in the active conduct of trade or business. Property that is not considered Section 179 property includes land, buildings, property used outside the United States, property used by tax-exempt organizations (except property used in connection with the production of income subject to tax on unrelated trade or business income), most property used for lodging, and property used by government units or foreign entities.

The Section 179 amounts for 2014 will be reduced significantly. The table below compares the rules in 2013 to the rules in 2014:

YEAR MAXIMUM DEDUCTION DOLLAR LIMITATION
2013 $500,000 $2,000,000
2014 $25,000 $200,000

The other method for accelerated depreciation is Bonus depreciation (Code Section 168(k)). Bonus depreciation allows an immediate deduction for 50% of the cost of qualified property placed in service during 2013 (the remaining 50% is depreciated over the tax life of the asset). Qualified property is property that:

  1. Has a depreciable life of 20 years or less (including computer software and qualified leasehold improvement property);
  2. Is original use property (meaning that original use of the asset begins with the taxpayer); and
  3. Is placed in service after December 31, 2007 but before January 1, 2014.

Bonus depreciation can provide a good alternative to Section 179 because it contains no dollar limitations and can be taken regardless of taxable income (i.e., even if the business activity produces a loss).

In 2014, bonus depreciation will apply only to certain non-commercial aircraft and to longer-production property that was acquired pursuant to a written binding contract entered into prior to January 1, 2014.

These changes to accelerated depreciation do not impact the ultimate amount of depreciation that can be deducted over the life of the asset. Rather, the deduction will be pushed into future years, so while the immediate benefit will not be as great, the total benefit remains the same.

However, the time value of the taxes saved by these benefits can be significant, and as 2013 comes to an end, it may be prudent to consider whether it makes sense for you or your business to take advantage of accelerated depreciation in 2013 before these changes take effect.

If you would like to discuss further, please call your BNN advisor at 1-800-244-7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

IRS CIRCULAR 230 DISCLOSURE:
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact us if you wish to have formal written advice on this matter.