Global Tax Insights
Should You Take Bonus Depreciation or Sec. 179 Expensing on Your 2014 Return?March 25, 2015
If your business purchased — and placed in service — qualified assets in 2014, you may be eligible for enhanced depreciation-related breaks on your 2014 income tax return.
If your business purchased — and placed in service — qualified assets in 2014, you may be eligible for enhanced depreciation-related breaks on your 2014 income tax return. Both Section 179 expensing and 50% bonus depreciation can provide valuable tax savings, but which is better for you depends on various factors. You could even be better off forgoing both breaks and following normal depreciation schedules.
Section 179 Expensing
Under this election, you can deduct 100% of the cost of acquiring qualified assets, up to $500,000 for 2014. However, this expensing limit is phased out dollar-for-dollar if qualified asset purchases for the year exceed $2 million. So, if your 2014 purchases exceeded $2.5 million, you can’t benefit from Sec. 179 expensing.
Also keep in mind that the election can’t reduce net income below zero. So if your business didn’t have any net profit in 2014, you can’t use the election to create or increase a net operating loss for tax purposes.
With this additional first-year depreciation allowance, you can deduct 50% of the cost of acquiring qualified assets. Among the assets that qualify are new tangible property with a recovery period of 20 years or less and off-the-shelf computer software.
There are no asset purchase limits or phase-outs on bonus depreciation. However, used assets don’t qualify.
Weighing Your Options
Many businesses can benefit from reducing their 2014 tax bills by taking advantage of these depreciation-related breaks. But before you claim them on your return, assess whether the larger 2014 deductions will likely prove beneficial over the long term. Taking these deductions now means forgoing deductions that could otherwise be taken later, over a period of years under normal depreciation schedules.
In some situations, future deductions could be more valuable. For example, if you expect to be in a higher tax bracket in the future or you expect tax rates to go up, you could ultimately save more by deferring the deductions. Remember, because deductions reduce the amount of income that’s taxed, they’re more valuable when tax rates are higher.
What’s Best for You?
If you aren’t sure whether you qualify for Sec. 179 expensing or bonus depreciation, don’t know which one is better for you or wonder whether you’d be better off following normal depreciation schedules, please contact us. We can help assess your specific situation and what’s best for you on your 2014 return.