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Depreciating Property for Tax Purposes

Depreciation2Depreciation deductions can be extremely valuable for a business. For example, in a recent court case, a federal judge ruled a company could begin taking its depreciation deductions for two buildings housing retail stores at a point prior to when they were “open for business.” The ruling allowed the company to show a loss for that tax year, which the company then used to offset income in earlier years and ultimately claim a total tax refund of over $2 million.*

Although this case involved a special 50% depreciation allowance made available by the Gulf Opportunity Zone Act of 2005, the fact remains that even regular depreciation deductions can significantly reduce a company’s tax bill.

General Rules

If business property has a useful life greater than one year, the owner generally is prohibited from deducting the full cost of the property in the year it is placed in service. Instead, a portion of the cost may be deducted each year as depreciation. The depreciation rules apply to most types of tangible property, with notable exceptions being inventory and unimproved land.

Different schedules specify the proper depreciation calculations for different types of property. The most widely used schedules are set forth under the Modified Accelerated Cost Recovery System (MACRS). MACRS assigns property to a recovery class based on the property’s “class life.”

For example, office equipment is assigned to the seven-year MACRS class. Assume a business purchased a piece of equipment for $20,000 and placed it in service in 2012. The property would be in its fourth year of service in 2015. Applicable IRS tables indicate that the appropriate deduction percentage is 12.49% of the cost, so the business could deduct $2,498 for that equipment in 2015.**

Placed in Service

As the above-mentioned court decision suggests, the date property is placed in service can be an important consideration. Though the IRS has specific definitions for different types of assets, generally, property is first placed in service on the date the taxpayer first places it “in a condition or state of readiness and availability for a specifically defined function.”

Because the definition is broad, taxpayers sometimes litigate how it should be applied to specific situations. In the decision mentioned above, the key issue was the “placed-in-service” date of two buildings that would eventually be used as building supply stores. The IRS had argued that the “placed-in-service” requirement meant that the buildings had to be open for business for retail customers. The court disagreed, however, holding that the buildings were placed in service when they were substantially complete and limited certificates of occupancy had been issued so that workers could enter the buildings to install necessary racks and shelving.

Related Provisions

Businesses may be able to benefit from the tax law’s Section 179 provisions to garner faster write-offs for some of their asset purchases. Currently, businesses will be allowed to expense up to $25,000 of qualifying property placed in service during the 2015 tax year, with that limit subject to further reduction once the amount placed in service exceeds $200,000.*** In addition, a current deduction may be available for certain limited amounts paid for property that the business expenses for financial accounting purposes. We can tell you more about these “de minimis safe harbor” regulations.

If you are tired of overpaying taxes, then call 410-466-3779 and ask for Steve Graber.  Lower your overall tax liability using depreciation is right up our alley.

 

Graber and Associates is a Baltimore CPA Accounting Firm with two convenient office locations, Downtown Baltimore and Pikesville.  To better service our small business clients who use QuickBooks, we are Certified QuickBooks ProAdvisors.

 

 

 

* Stine, LLC v. USA (DC LA, 1/27/2015)

** Calculation assumes the half-year depreciation convention.

*** Congress kept the Section 179 limit at $500,000 for 2014 in late-year extender legislation.

Tax Extenders for Baltimore Businesses

Tax BreaksTax extenders are a group of fifty tax breaks that apply not only to small businesses but teachers and individuals as well. What you need to be concerned with are those that apply directly to small businesses. While these tax breaks are temporary in nature, they can have a serious impact on how you conduct your business for the next year.

In 2013, these tax breaks actually expired on December 31st, but the United States Congress retroactively extended the tax breaks into 2014. They typically do this at the last moment of the year, or right after the first of the new year, making it difficult for small businesses to plan ahead. These tax breaks are also only renewed for one year meaning they will have need to extend them again before the end of 2014, so they can carry over into 2015.

Currently, the tax extenders for small businesses include such items as a work opportunity tax credit of $1,375, a 15-year straight line cost recovery for qualified leasehold improvements for restaurant and retail establishments of $2,382, and bonus depreciation of $1,492.

Additional tax extenders include:

  • Exclusion of 100% of gain on certain types of small business stocks
  • A reduction in the S Corporation recognition period for built-in gains tax
  • Qualified zone academy bonds
  • An employer wage credit for activated military reservists
  • A new market tax credit

While not all tax extenders are good policy for the government or businesses, some of the tax breaks do help level the playing field and provide companies a way to define actual business expenses with less effort.

If you are tired of overpaying taxes, then call 410-466-3779 and ask for Steve Graber.  Our initial consultation for small businesses is free.  

 

Graber & Associates is a full service Baltimore CPA Firm.  Our firm has been servicing small businesses and individuals throughout Baltimore for over twenty years.  We provide two convenient office locations, Downtown Inner Harbor on International Drive and Park Heights near Pikesville MD.