Did You Purchase or Renovate Business Property in 2014?
Recent Tax Extenders Give Reason to Celebrate
President Obama signed the Tax Increase Prevention Act of 2014 on Dec. 19, which extends through Dec. 31, 2014 more than 50 tax relief provisions that had expired at the end of 2013.
If you are a business owner that purchased or renovated real or personal property in 2014, you should pay particular attention to three of the extenders that may provide significant tax savings for your business.
The following tax extenders relate specifically to depreciation or expensing provisions.
Section 179 expense election amount
Qualified taxpayers have the ability to deduct up to $500,000 of new or used qualified tangible personal property under Section 179. The $250,000 deduction for qualified leasehold, restaurant and retail improvement property also was reinstated. According to the IRS, examples of qualified tangible personal property include:
- Machinery and equipment
- Property contained in or attached to a building like signage, grocery store counters, printing presses and refrigerators
The $500,000 deduction is limited once the taxpayer spends $2 million on qualified tangible personal property during the year.
Bonus first-year depreciation
The law extends 50 percent first-year bonus depreciation for qualified property through 2014. Qualified property generally includes new assets with a recovery period of 20 years or less. Taxpayers are permitted to depreciate 50 percent of the qualified property cost in the first year before applying depreciation rules to the remaining 50 percent of the cost of the property. The benefits of bonus depreciation are best illustrated with an example:
In May 2014, Taxpayer A placed in service a new manufacturing facility, which cost $5 million for the building and $4 million for equipment. The equipment is qualified property and eligible for bonus depreciation. Bonus depreciation is $2 million ($4 million X 50 percent). The remaining cost of $2 million ($4 million - $2 million of bonus depreciation) is depreciated over the life of the equipment (7 years at 14.29 percent for the first year). This results in $2,285,800 total depreciation for the equipment for 2014 ($2 million X 14.29% = $285,800 + $2 million bonus depreciation).
Regular depreciation would have only been $571,600 ($4 million X 14.29%) prior to the tax law extension. Taxpayer A will be able to deduct an additional 43 percent of the cost.
With the extension of bonus depreciation, special consideration should be given to determine if taxpayers should conduct a cost segregation study to maximize their tax deductions. A cost segregation study incorporates an engineering-based approach to segregate certain components of a building into personal property, such as wiring and the concrete floor supporting manufacturing equipment, which is eligible for bonus depreciation. A cost segregation study maximizing the benefits of bonus depreciation should be considered for any new construction, renovation or expansion of a facility.
Although not eligible for bonus depreciation, a cost segregation study also can provide tax benefits when an existing building is acquired.
15-year cost recovery
The provisions extend the inclusion of qualified leasehold improvement property, restaurant property and retail improvement property in the 15-year Modified Accelerated Cost Recovery System (MACRS) class as opposed to the traditional 39-year recovery period. This property also may qualify for bonus depreciation discussed above.
Accelerating deductions, lowering income taxes and increasing cash flow are great ways to start the New Year.