With only two weeks remaining in 2014, Congress did the expected and passed the Tax Increase Prevention Act of 2014 (TIPA), with President Obama signing the Act into law soon thereafter. For the 2014 tax year, TIPA extends certain business and individual tax breaks, most commonly known as the “extenders.”
For businesses, these tax breaks include, but are not limited to, the Section 179 Deduction, Bonus Depreciation, a reduced recognition period for S corporation built-in gains tax, and the exclusion of 100 percent of gain on certain small business stock. Furthermore, TIPA provides a variety of tax breaks to individuals, including, but not limited to, an exclusion for discharged home mortgage debt, a deduction for state and local sales tax, and nontaxable IRA transfers to eligible charities.
The Section 179 Deduction was designed to incentivize small and medium sized businesses to make capital purchases and invest in themselves. Under Section 179, businesses are allowed to deduct the entire purchase price of certain equipment and/or software that was either purchased, leased, or financed during the taxable year. This enables businesses to deduct the entire purchase price of the equipment from their gross income, as opposed to only a portion of the purchase price on an annual basis. However, the total amount that can be written off is capped at $500,000 and puts a limit on the total amount of equipment purchased at $2 million.
In order to qualify for the Section 179 Deduction, businesses must purchase, lease, or finance less than $2 million in new or used equipment during the taxable year. Importantly, the deduction begins to phase-out at $2 million. Moreover, not only does the deduction begin to phase-out on a dollar-for-dollar basis at $2 million, the deduction actually decreases on a dollar-for-dollar basis on any amount exceeding the $2 million threshold.
Not every type of property qualifies for the Section 179 Deduction. Property qualifying for the deduction includes, but is not limited to:
- equipment purchased for business use;
- business vehicles (the gross weight being greater than 6,000 pounds);
- computers and “off-the-shelf” computer software;
- tangible business-related personal property;
- office furniture and equipment;
- property that is attached to the business building, but is not considered a structural component of the building; and
- property used partially for business purposes (meaning that the deduction will be calculated based off of the percentage that the equipment was used for business purposes), where the business use is greater than 50 percent.
Once the $500,000 cap is reached, Bonus Depreciation can be combined with the 179 Deduction. This means that between the $500,000 cap and the $2 million phase-out threshold, businesses can deduct up to 50 percent of any additional qualified new equipment purchases made in 2014. Therefore, if a company buys $500,000 of office furniture, as well as qualified equipment for an additional $1.5 million, the company can take the 179 Deduction on the first $500,000, a dollar-for-dollar deduction, and then take a 50 percent deduction on the $1.5 million of qualified equipment, assuming the equipment was purchased in 2014.
While Congress came through in the final seconds to extend these tax breaks, they were only extended through 2014. Therefore, uncertainty still looms as to whether or not these breaks will be extended through 2015 and as to whether Congress and President Obama can come to an agreement on a more long-term, comprehensive tax legislation.
Brian P. O’Neil is an associate with the firm. He earned his J.D. at the Rutgers School of Law, and his Bachelor’s Degree in Business Administration – Finance from Loyola University Maryland. Mr. O’Neil is currently pursuing his LL.M. in Taxation from the Temple University Beasley School of Law.