Sage Fixed Assets Year-end tax planning for fixed assets management

Sage Fixed Assets Year-end tax planning for fixed assets management

Table of contents
Introduction 3 Bonus depreciation Vehicles and bonus depreciation Other bonus depreciation planning tips Section 179 expensing Increased limits Avoiding the midquarter averaging convention Certain real property and section 179 Other section 179 planning tips 15-year leasehold improvement property Additional expiring tax provisions relating to xed assets 3 3 4 4 4 4 5 6 6 7

Conclusion 8

Sage Fixed Assets Year-end tax planning for fixed assets management

Several important tax provisions are scheduled to expire at the end of 2013. If you dont want to lose out on some valuable deductions, it is time to do some serious tax planning. While it is possible Congress will extend or make permanent some of these provisions, we are well aware that the legislators may have other priorities. If you plan now, however, you may be able to take advantage of many of these benets before the end of the year, and, should Congress act, well, theres nothing wrong with planning ahead and enjoying further benets next year also. While there is a wide range of tax provisions expiring this year, you may be surprised how many relate to xed assets. This paper focuses on these and gives you some tips on making the most of them before they disappear. Plus, other tax planning strategies for xed assets management are also discussed.

If you dont want to lose out on some valuable deductions, it is time to do some serious tax planning.

Bonus depreciation
Probably the most signicant of all the expiring tax provisions is the IRS Code Section 168(k) deduction for 50% of the depreciable basis of qualifying property in its placedin-service year (a.k.a. bonus depreciation). While bonus depreciation will still be allowed for another year (through 2014) for certain aircraft and property having a longer production period, most property will no long qualify for it after this year unless the tax provision is extended. Bonus depreciation was never intended to be permanent. However, because it has proved so popular as an economic stimulus even though it was allowed to expire several times since it was rst introduced by the Job Creation and Worker Assistance Act of 2002, it has been brought back every time. (Although once due to the Economic Stimulus Act of 2008, it was not made retroactive when it was reintroduced). Now, however, both because our economy is slowly recovering and because Congress has been at a standstill, it is possible this is the last we will see of this valuable deduction in the foreseeable future. It may be a good idea, therefore, to accelerate any planned purchases of xed assets and claim bonus depreciation on them this year. Of course, doing so clearly has to make good business sense. If, for example, you are trying to absorb an earlier year net operating loss (NOL) that is about to expire, you may not benet from the added deduction. On the other hand, if you either have signicant income in 2013 or will incur a loss, either of these scenarios can provide impetus to claim bonus. The benet of a decrease in net income is obvious, but an increase in an NOL can be benecial as well as it can be carried either back or forward to offset earlier or future prots. Vehicles and bonus depreciation There is an additional $8,000 deduction allowed under the luxury car rules for qualifying vehicles placed in service this year. It applies to passenger automobiles, as well as light trucks and vans. If the deduction for bonus depreciation goes away, so will the additional allowance on vehicles. Purchasing any vehicles this year guarantees a much quicker write off.

Sage Fixed Assets Year-end tax planning for fixed assets management

Other bonus depreciation planning tips If you claim the bonus depreciation deduction, no depreciation adjustment is needed for the alternative minimum tax (AMT) on the property. Bonus depreciation simply reduces the assets AMT depreciable basis as well. The remaining basis of the property for AMT purposes is then depreciated using the same method and recovery period as for regular tax purposes. Furthermore, should 2013 not be a full 12-month tax year, the bonus depreciation deduction does not need to be prorated. Even if you place in service qualifying property on the last day of 2013, you can write off 50% of its cost. Finally, dont forget the following: To qualify for bonus depreciation, it must be new property. Bonus depreciation is a mandatory write off unless you elect out of it.

Although Section 179 will still be available, these amounts will decrease considerably.

Section 179 expensing

Increased limits Another important tax provision that is scheduled to expire at the end of the 2013 tax year is the generous increase in the amount of Section 179 expense currently allowed under IRS Code Section 179. Since 2003, both the allowable annual amount of Section 179 expense and the threshold amount for qualifying Section 179 property (beyond which the annual expensing limit is reduced, dollar for dollar) have been greatly increased. In fact, these amounts have had such signicant increases in the last ten years that in 2013, you can currently claim $500,000 of Section 179 expense and the threshold amount is $2,000,000. However, if Congress does not act, although Section 179 will still be available, these amounts will decrease considerably to be $25,000 and $200,000 respectively for tax years beginning in 2014. If a business is thinking about investing in a large amount of equipment or machinery next year, it would certainly be a good idea to consider moving up any signicant purchases to 2013. Of course, this should not be done if a business wants to purchase more property than can be expensed this year. If the business has already either expensed its limit or reached the threshold so that it is not allowed at all, additional purchases might be delayed until next year when it might be more likely to be expensed. Avoiding the midquarter averaging convention Many businesses try to avoid placing in service too many assets during the last three months of the year in order to avoid having the midquarter averaging convention apply (this occurs when you place in service more than 40% of your xed assets during the last three months of the year). Although bonus depreciation does not affect the 40% test, Section 179 expense does. Any Section 179 expense reduces the basis of assets before calculating the 40% test. Therefore, purchasing additional assets at the end of the year and expensing them under Section 179 may not trigger the midquarter convention. Naturally, as with any tax planning strategy, much has to be taken into account before doing this. For example, before trying to avoid the midquarter convention, realize it actually produces more depreciation for any assets placed in service during the rst three months of the year.

Sage Fixed Assets Year-end tax planning for fixed assets management

Certain real property and section 179 Until the Small Business Jobs Act of 2010, Section 179 expense could only be claimed on qualifying personal property. However, the 2010 Act expanded the denition of Section 179 property to include qualifying real property: certain leasehold improvements, restaurant property, and retail improvement property. This is under IRS Code Section 179(f). For a limited period of time (originally only for tax years beginning in 2010 and 2011), taxpayers are able to claim $250,000 of Section 179 expense on these types of real property. Because of the struggling economy, this provision was extended, but only through 2013. (Note that for purposes of the $500,000 annual Section 179 expense limitation mentioned above, no more than $250,000 can be claimed on qualifying real property. In other words, this is not an additional allowable amount but is included in the $500,000 annual limit.) Qualifying real property* for this purpose is the following: a) Qualifying leasehold improvements are: In leased nonresidential real property. Occupied exclusively by the lessee or sublessee. Placed in service more than three years after the building was rst placed in service. Cannot constitute an enlargement of the building and cannot be an elevator, escalator, a structural component benetting a common area, nor an interior structural component. b) Qualifying restaurant property is: Section 1250 property. An improvement to a building. Made to a building where more than 50% of the square footage is devoted to the preparation of, and seating for, on-premises consumption of prepared meals. c) Qualifying retail improvement property is: An improvement made to the interior of nonresidential real property. Has a portion open to the general public and used in retail sales. Placed in service more than three years after the building was rst placed in service. Cannot constitute an enlargement of the building, cannot be an elevator, escalator, a structural component benetting a common area, nor an interior structural component. *See below for more information on qualied leasehold improvement property with a 15-year recovery period. It is important to note that no amount of claimed but unused Section 179 expense attributed to qualifying real property may be carried over to a tax year beginning after 2013. Bonus tip: Treating the real property described above as qualifying Section 179 property is an election and, as such, is not mandatory. Given that you have a choice, it is important to take all factors into consideration before making the election. For example, if the business has already placed in service $500,000 of qualifying Section 179 property this year and is considering purchasing another $2,000,000 of qualifying real property, by electing to treat the latter as Section 179 property, you would receive no benet from Section 179 expense for the year. This is because any

For a limited period of time, taxpayers are able to claim $250,000 of Section 179 expense on these types of real property.

Sage Fixed Assets Year-end tax planning for fixed assets management

amount of property over the $2M threshold would reduce the annual $500,000 limit on a dollar-for-dollar basis. Placing in service $2,500,000 worth of property in 2013 would mean no Section 179 expense would be allowed. Other section 179 planning tips When a business has an asset it is considering trading in to acquire a newer or different version, it should consider whether the new asset will qualify for Section 179 expense. To qualify as Section 179 property, it must be acquired by purchase. Therefore, if an asset is used as a trade-in, only the additional amount paid, if any, for the newly acquired asset would be eligible for Section 179 expense. A better strategy may be for the business to sell the older asset rather than trading it, in order to be able to expense the full amount of the replacement assets cost under Section 179 (provided the assets cost is within the allowable limits, of course). Another tax planning tip is for a business that is not expecting enough income this year to be concerned about needing to offset it. While this may be the case, remember as long as a business has sufcient earnings to cover the amount of Section 179 expense (a.k.a., the taxable income limit), any Section 179 amount claimed but not deducted may be carried forward indenitely. (The only Section 179 expense this does not apply to is that claimed on qualifying real property as explained above.) Section 179 expense will still be a viable deduction, albeit in future years and with a possibly lower allowable amount. While bonus depreciation can only be claimed on new property, Section 179 expense can be claimed on new or used property. Therefore, a taxpayer might claim Section 179 expense on property that does not qualify for bonus depreciation. And, nally, when claiming Section 179 expense, the best way to maximize the tax benet from it is by expensing qualifying property with the longest recovery period. This accelerates the deduction in the most effective way.

There are actually two reasons why you may want to acquire qualified leasehold improvement property before the end of the year.

15-year leasehold improvement property

There are actually two reasons why you may want to acquire qualied leasehold improvement property before the end of the year. First, qualied leasehold improvement property can be depreciated, using the straight-line method, over a 15-year recovery period if placed in service before 2014. This provision has been in effect now for several years and greatly shortens the otherwise required recovery period of 39 years for nonresidential real property. However, unless this tax provision is extended, such property will have a signicantly longer recovery period if placed in service after 2013. The second reason to acquire such property in 2013 is, if it meets the denition of both qualied leasehold improvement property and either qualied restaurant property or qualied retail improvement property, it is eligible for bonus depreciation (that is, before bonus depreciation expires). This is per Revenue Procedure 2011-26.

Sage Fixed Assets Year-end tax planning for fixed assets management

Additional expiring tax provisions relating to fixed assets

The following are additional tax provisions that provide benets for xed assets, which, unless extended, will expire at the end of 2013: Alternative fuel vehicle refueling property (nonhydrogen refueling property)* (Sec. 30C) For qualifying property placed in service in 2013, there is a credit of 30% of the cost of any qualied alternative fuel vehicle refueling property that does not relate to hydrogen. The credit is limited to $30,000 per location per year. *The credit for such property that relates to hydrogen expires December 31, 2014. Credit for two- or three-wheeled plug-in electric vehicles (Sec. 30D) In 2012 through 2013, there is a credit for placing in service qualifying two- and three-wheeled plug-in electric vehicles. The credit is the lesser of $2,500 or 10% of the vehicles cost. Three-year depreciation for race horses two years old or younger (Sec. 168(e)(3)(A)) Three-year property includes race horses placed in service in 2009 through 2013. Since there is no class life assigned to these horses, if the tax provision is allowed to expire, such horses will have a seven-year recovery period starting in 2014. Seven-year recovery period for motorsports entertainment complexes (Secs. 168(i)(15) and 168(e)(3)(C)(ii)) Accelerated depreciation for business property on an Indian reservation (Sec. 168(j)) Qualied Indian reservation property benets from accelerated depreciation due to shorter recovery periods being allowed. This tax provision has been in effect since 1994. Election to accelerate AMT credits in lieu of bonus depreciation (Sec. 168(k)(4)) Through 2013 (through 2014 for certain aircraft and property having a longer production period), there is an election to forgo claiming bonus depreciation and instead increase the credit limitation on the Section 53(c) Alternative Minimum Tax credit and on the Section 38(c) General Business Credit for research expenditures. Special depreciation allowance for second generation biofuel plant property (Sec. 168(l)) Taxpayers may deduct 50% of second generation biofuel plant propertys depreciable basis in its placed-in-service year, reducing the basis of the property.

Additional tax provisions that provide benefits for fixed assets will expire at the end of 2013.

Sage Fixed Assets Year-end tax planning for fixed assets management

Election to expense advanced mine safety equipment (Sec. 179E) A taxpayer can make an election to treat 50% of the cost of any qualied advanced mine safety equipment as a deduction in the current year, reducing the basis of the property. Empowerment zone tax incentives: Increased expensing under Section 179 (Secs. 1397A and 1391(d)(1)(A)(i)) Qualifying property is allowed an additional $35,000 (or the cost of the qualifying property, if less) of Section 179 expense. (The empowerment zone tax incentives may expire earlier than December 31, 2013, if a state or local government so provides.)

If you are aware these tax benefits are about to expire, you may be able take advantage of them before the end of the year.

Conclusion
It is certainly surprising when you look at all of the above tax provisions grouped together like this that there are so many expiring this year related to xed assets management. While the provisions for bonus depreciation and the increased Section 179 amounts will affect the largest number of businesses, all of them can result in signicant tax benets when applicable. At least, if you are aware these tax benets are about to expire, you may be able take advantage of them before the end of the year. And, although you would think as important as these tax provisions are to businesses and, thus, the economy, there simply is no way of predicting which of these, if any, may be extended. Furthermore, even should they all be allowed to expire due to inaction on the part of Congress, it is always a possibility that they will eventually get extended later and those extensions may even be made retroactive. This is not something you can count on occurring, however.

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