Multiple Options for First-Year Expensing. Let me count the ways…..

2 minute read time.

When acquiring new property, for tax reporting purposes, one has to (or at the very least, one should) consider the different available options that exist today for expensing part or all of an asset’s cost in the year in which it is placed in service. So, how many ways are there????

I can think of three:

  1. De minimis safe harbor rule: Effective in 2014, there is a new rule allowing businesses to deduct items of qualifying property as long as they cost $5,000 or less each and certain other requirements are met.

The $5,000 amount is per item or per invoice, as long as the business has the following:

    • An applicable financial statement,
    • Written accounting procedures for expensing amounts paid for such property under a specified dollar amount (or for property with an economic useful life of 12 months or less), and
    • The taxpayer must expense such amounts on their financial statements in accordance with these procedures.

 

Companies without an AFS may use the de minimis safe harbor to expense up to $500 per asset or invoice.

  1. Bonus depreciation: IRS Code Section 168(k) allows a taxpayer to expense 50% of an asset’s cost in the year in which it is placed in service. This additional first-year amount of depreciation on certain qualifying property is referred to as “bonus depreciation.” The provision for bonus depreciation is only temporary and, unless extended, expired at the end of 2013 (although you may claim it on certain property with longer production periods through 2014).
  2. IRS Code Section 179 expensing: Code Section 179 allows taxpayers to make an election to deduct part or all of the cost of qualifying property. There are specified allowable dollar amounts based on the year in which the property is placed in service, as well as other restrictions.

One of the restrictions on the amount of Section 179 expense that may be claimed is an investment limit whereby for every dollar of investment over a threshold amount of qualifying Section 179 property placed in service in the same taxable year, the allowable amount deducted under Section 179 is reduced by one dollar. In addition, the total amount of Section 179 expense taken in any one year is limited to the amount of the entity’s taxable income from the conduct of an active trade or business.

For 2014, unless Congress acts, the maximum amount of Section 179 expense is $25,000 and the investment threshold amount is $200.000.

While none of these first-year expensing options are mandatory, it is good to know you have a choice on whether or not to depreciate or expense portions of certain property.

 

                       

 

Fascinating Fixed Assets Fact: Note you can claim both bonus depreciation and Section 179 expense in the same year on the same asset. However, any amount claimed under Section 179, would be deducted first before applying the allowed percentage amount for bonus depreciation