Several favorable business tax provisions have a limited shelf life that may dictate taking action between now and year-end. Here are the most important ones.
Bigger Section 179 Deduction. Your business may be able to take advantage of the temporarily increased Section 179 deduction. Under the Section 179 deduction privilege, an eligible business can often claim first-year depreciation write-offs for the entire cost of new and used equipment and software additions. For tax years beginning in 2013, the maximum Section 179 deduction is a whopping $500,000. For tax years beginning in 2014, however, the maximum deduction is scheduled to drop back to only $25,000.
Note: Watch out if your business is already expected to have a tax loss for the year (or close) before considering any Section 179 deduction. You cannot claim a Section 179 write-off that would create or increase an overall business loss. Please contact us if you think this might be an issue for your operation.
Section 179 Deduction for Real Estate. Real property improvement costs are generally ineligible for the Section 179 deduction privilege. However, a temporary exception applies to tax years beginning in 2010– 2013. Under the exception, your business can immediately claim a Section 179 deduction of up to $250,000 of qualified improvement costs for (1) interiors of leased nonresidential buildings, (2) restaurant buildings, and (3) interiors of retail buildings. The $250,000 Section 179 allowance for real estate improvements is part of the overall $500,000 allowance. Unless extended, this real estate break will not be available for tax years beginning after 2013.
Note: Once again, watch out if your business is already expected to have a tax loss for the year (or is close to it) before considering any Section 179 deduction. You can’t claim a Section 179 write-off that would create or increase an overall business tax loss.
50% First-year Bonus Depreciation. Above and beyond the Section 179 deduction, your business can claim first-year bonus depreciation equal to 50% of the cost of most new (not used) equipment and software placed in service by December 31 of this year. For a new passenger auto or light truck that’s used for business and is subject to the luxury auto depreciation limitations, the 50% bonus depreciation break increases the maximum first-year depreciation deduction by $8,000. The 50% bonus depreciation break will expire at year-end unless Congress extends it.
Note: 50% bonus depreciation deductions can create or increase a Net Operating Loss (NOL) for your business’s 2013 tax year. You can then carry back the NOL to 2012 and/or 2011 and collect a refund of taxes paid in one or both those years.
100% Gain Exclusion for Qualified Small Business Stock Issued This Year. The fiscal cliff legislation enacted earlier this year extended the temporary 100% gain exclusion privilege for eligible sales of Qualified Small Business Corporation (QSBC) stock issued in calendar-year 2013. So, there is a short fuse on stock issuances that will qualify for the 100% gain exclusion break, unless Congress extends it.
Note: QSBC shares must be held for more than five years to be eligible for the 100% gain exclusion break, so we are talking about sales that will occur well down the road.