Dana Bull, CPA •
Businesses that want to accelerate year-end deductions by buying machinery and equipment have a formidable array of tax tools to work with this year: generous expensing under Code Sec. 179; and an expensing safe harbor under the capitalization regulations that has been liberalized for smaller businesses.
Businesses that want to accelerate year-end deductions by buying machinery and equipment have a formidable array of tax tools to work with this year: generous expensing under Code Sec. 179; and an expensing safe harbor under the capitalization regulations that has been liberalized for smaller businesses.
Expensing using Code Sec. 179
Under Code Sec. 179, a taxpayer can elect to deduct as an expense, rather than to depreciate, up to $500,000 of the cost of new or used tangible personal property placed in service during the tax year in the taxpayer's trade or business. The maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of Code Sec. 179 property placed in service during the tax year in excess of a $2,010,000. The amount eligible to be expensed for a tax year can't exceed the taxable income derived from the taxpayer's active conduct of its trades or businesses. Any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding tax years. Taxpayers should consider making the expensing election even in a year where a less-than-full tax benefit is derived from the election because of the taxable income limit. This way, the right to carry the expensing deduction forward to other years will be preserved
Expensing limits. For tax years beginning in 2016: (1) the dollar limitation on the expensing deduction is $500,000; and (2) the investment-based reduction in the dollar limitation starts to take effect when expensing-eligible property placed in service in the tax year exceeds $2,010,000 (the investment ceiling). For tax years beginning in 2017, the dollar limitation on expensing will be $510,000 and the investment ceiling will be $2,030,000.
Expensing Safe Harbor in Capitalization Regulations has been increased
Under the tangible property regulations, a taxpayer generally must capitalize amounts paid to acquire or produce property, whether real or personal, including assets such as land and land improvements, buildings, machinery and equipment, and furniture and fixtures. Fortunately, the tangible property capitalization regulations contain an exception to the general capitalization requirement, allowing businesses to elect to expense certain lower-cost business assets.
Many businesses may be able to use this exception, the "de minimis safe harbor election," to expense certain business assets well in excess of the Code Sec. 179 expensing dollar limit or to save the use of the Code Sec. 179 allowance for assets that don't qualify for the de minimis safe harbor. The "de minimis safe harbor election" may be particularly useful when it comes to year-end planning, as it is available for qualifying assets even if they are bought and placed in service near the close of the taxpayer's tax year.
The safe harbor is essentially an election to treat certain outlays for lower-cost assets, materials and supplies in the same manner for tax purposes as for book purposes-so-called book-tax conformity. If the conditions of the election are met, costs that a business would otherwise have to capitalize and depreciate over a number of years for tax purposes can instead be deducted in the year of purchase, assuming they otherwise qualify as ordinary business expenses. And unlike the Code Sec. 179 expensing election, there is no aggregate annual dollar limit on the amount that can be deducted under the de minimis safe harbor election.
The de minimis safe harbor election is made for the tax year (by attaching a statement to a timely filed-including extensions-original Federal income tax return); it applies to all expenses that qualify for the safe harbor for that year.
The safe harbor applies to amounts paid during the tax year to acquire or produce what a "unit of property" or acquire a material or supply, if:
As stated per the IRS regulations, an AFS includes a financial statement required to be filed with the SEC, as well as other types of certified audited financial statements accompanied by a CPA report, including a financial statement provided for a loan, reporting to shareholders, or for other non-tax purposes. An AFS also includes a financial statement required to be provided to a federal or state government or agency other than the IRS or the SEC.
The benefits of the election are evident for companies with an AFS. Since many smaller companies don't have an AFS, however, any safe harbor election they make generally will be limited to items costing no more than $2,500. Even so, they will benefit because amounts expensed under the safe harbor won't eat into their $500,000 Code Sec. 179 expensing limit.
Under Code Sec. 179, a taxpayer can elect to deduct as an expense, rather than to depreciate, up to $500,000 of the cost of new or used tangible personal property placed in service during the tax year in the taxpayer's trade or business. The maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of Code Sec. 179 property placed in service during the tax year in excess of a $2,010,000. The amount eligible to be expensed for a tax year can't exceed the taxable income derived from the taxpayer's active conduct of its trades or businesses. Any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding tax years. Taxpayers should consider making the expensing election even in a year where a less-than-full tax benefit is derived from the election because of the taxable income limit. This way, the right to carry the expensing deduction forward to other years will be preserved
Expensing limits. For tax years beginning in 2016: (1) the dollar limitation on the expensing deduction is $500,000; and (2) the investment-based reduction in the dollar limitation starts to take effect when expensing-eligible property placed in service in the tax year exceeds $2,010,000 (the investment ceiling). For tax years beginning in 2017, the dollar limitation on expensing will be $510,000 and the investment ceiling will be $2,030,000.
Expensing Safe Harbor in Capitalization Regulations has been increased
Under the tangible property regulations, a taxpayer generally must capitalize amounts paid to acquire or produce property, whether real or personal, including assets such as land and land improvements, buildings, machinery and equipment, and furniture and fixtures. Fortunately, the tangible property capitalization regulations contain an exception to the general capitalization requirement, allowing businesses to elect to expense certain lower-cost business assets.
Many businesses may be able to use this exception, the "de minimis safe harbor election," to expense certain business assets well in excess of the Code Sec. 179 expensing dollar limit or to save the use of the Code Sec. 179 allowance for assets that don't qualify for the de minimis safe harbor. The "de minimis safe harbor election" may be particularly useful when it comes to year-end planning, as it is available for qualifying assets even if they are bought and placed in service near the close of the taxpayer's tax year.
The safe harbor is essentially an election to treat certain outlays for lower-cost assets, materials and supplies in the same manner for tax purposes as for book purposes-so-called book-tax conformity. If the conditions of the election are met, costs that a business would otherwise have to capitalize and depreciate over a number of years for tax purposes can instead be deducted in the year of purchase, assuming they otherwise qualify as ordinary business expenses. And unlike the Code Sec. 179 expensing election, there is no aggregate annual dollar limit on the amount that can be deducted under the de minimis safe harbor election.
The de minimis safe harbor election is made for the tax year (by attaching a statement to a timely filed-including extensions-original Federal income tax return); it applies to all expenses that qualify for the safe harbor for that year.
The safe harbor applies to amounts paid during the tax year to acquire or produce what a "unit of property" or acquire a material or supply, if:
- at the beginning of the tax year, the taxpayer has written accounting procedures treating as an expense for non-tax purposes amounts paid for property costing less than a specified dollar amount, or with an economic useful life of 12 months or less;
- the taxpayer treats the amount paid for the property as an expense on its "applicable financial statement" (AFS), if it has one, or on its books and records if it does not, in accordance with its accounting procedures; and
- the amount paid doesn’t exceed $5,000 per item (as substantiated by invoice) if the taxpayer has an AFS, or $2,500 if the taxpayer doesn't have one.
As stated per the IRS regulations, an AFS includes a financial statement required to be filed with the SEC, as well as other types of certified audited financial statements accompanied by a CPA report, including a financial statement provided for a loan, reporting to shareholders, or for other non-tax purposes. An AFS also includes a financial statement required to be provided to a federal or state government or agency other than the IRS or the SEC.
The benefits of the election are evident for companies with an AFS. Since many smaller companies don't have an AFS, however, any safe harbor election they make generally will be limited to items costing no more than $2,500. Even so, they will benefit because amounts expensed under the safe harbor won't eat into their $500,000 Code Sec. 179 expensing limit.
