Written by Marc R Barnes EA
July 08, 2013

As a reminder, businesses may accelerate the expensing of qualified capital purchases. This can be done within two special provisions in the tax code.

What is depreciation?

Depreciation is a non-cash expense that reduces the value of an asset over time. Assets depreciate for two reasons:

  • Wear and tear.

    For example, an truck will decrease in value because of the mileage, wear on tires, engine and transmission, and other factors related to the use of the vehicle.
  • Obsolescence.

    Assets also decrease in value as they are replaced by newer models. Last year's computer is less valuable because there is a newer model in the marketplace.

What is amortization?

Amortization is also related to the concept of depreciation. While depreciation expenses the cost of a tangible asset over its useful life, amortization deals with expensing an intangible asset like a client list, goodwill and start-up costs.

Section 179

The American Taxpayer Relief Act of 2012 extends the annual $500,000 amount of qualified assets that may be expensed (instead of depreciated) for 2013. This benefit can be maximized as long as total assets purchased by your firm does not exceed $2 million. Qualified purchases can be new or used equipment and qualified software placed in service during the year.

Bonus Depreciation

The recent tax law also extends an additional first-year bonus depreciation of 50% of the cost of qualified property. To qualify the property must be purchased and placed in service after 1/31/2012 and before 1/1/2014. For property to qualify it must be "original use" property. This typically means new property. Not interested in accelerating your depreciation expense? Then you may choose to opt out of this provision for each category (class) of property you place in service.

What should you do?

So is taking advantage of these provisions good for your business? Not always.

Remember if you use these special asset "expensing" provisions, depreciation expense taken this year is given up in future years. This is especially important to plan for if your company is organized as a "flow through" entity like an S-Corporation as more income could be exposed to higher marginal tax brackets in a number of future years. How many future years? It depends on the recovery period of the asset, but the additional tax exposure could be from two to six years!

More importantly, if you think Congress will increase tax rates to help balance the budget, your future income may be exposed to a higher tax rate than your current income.

If you have some predictability in your business, it probably makes sense to forecast your projected pre-tax earnings with and without the accelerated depreciation to ensure you are making the right tax decision over the long-term.

Copper Canyon Tax and Accounting Services is a full service provider of business accounting,
business income tax, personal income tax, and payroll in Tucson, Arizona.