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A Look Ahead: Plan Now for Asset Purchases or Sales

By Marcia Richards Suelzer, MA, JD | October 28, 2013

Are you planning to purchase additional capital assets for your business? Would it help to be able to deduct one-half (or more) of the cost of that asset from your tax return? If so, then you need to put plans in motion to make the purchase and place the asset in service before the end of the year.

Although the year-end tax upheaval coming at the end of 2013 is a minor ripple compared to the uncertainty of 2012, year-end is likely to spell the end of many special tax-saving opportunities. If Congress doesn't act—and Congressional action has never seemed more unlikely—the following changes will hit hard if you delay asset purchases:

  • Bonus depreciation (currently 50 percent) will vanish entirely for virtually all assets placed in service after 2013
  • Expensing election maximum allowance will drop from $500,000 to $25,000, with a corresponding decrease in the investment limit from $2 million in 2013 to only $200,000, starting in 2014
  • The expensing election (up to $250,000) will no longer be available for qualified leasehold, restaurant and retail store property

The expensing election allows a business to write-off some (or all) of the cost of capital assets in the year they are acquired and placed in service, up to a specified annual amount. The annual amount limitation for 2013 is $500,000, but will drop dramatically to $25,000 in 2014. This annual dollar limit is the maximum that you can expense per year.

However, the maximum amount is reduced dollar-for-dollar by the amount your total investment exceeds it. This annual investment limit will also drop dramatically. It will go from $2 million in 2013 to only $200,000 in 2014. While most small businesses did not need to worry about their annual asset purchases exceeding $2 million, many could easily spend more than $200,000 in a single year.

There is a very real incentive to place assets in service this year, if you wish to have a generous first-year deduction.

Example

Raymond Johns plans to purchase $220,000 worth of equipment for use in his business. He is trying to decide whether to purchase and place the equipment in service in December, 2013, or wait until after the first of the year. The amount available as a expensing election could influence his decision.

Tax Year

Cost of Asset

Annual Amount

Annual Investment
Limitation

Amount To Be
Expensed

Amount To Be
Depreciated

2013

$220,000

$500,000

$2,000,000

$220,000

$0

2014

$220,000

$25,000

$200,000

$5,000

$215,000

In 2013, Johns could elect to expense the entire amount of the cost of the assets. However, in 2014, the most he will be able to elect to expense is $5,000. His expense election is limited because the annual investment limitation reduces the already greatly reduced $25,000 maximum annual amount, dollar-for-dollar for any amount over $200,000.

There is no need for panic, but there is a need for careful consideration of what your plans are to acquire major assets within the next few months. Remember, however, the tax-tail should never wag the business-dog. Your primary consideration must always be: "What makes sound business sense?" That said, now it the time of work with your tax professionals to evaluate the tax impact of purchases assets in 2013

By assessing your personal and business plans for the next year well before year's end, you have time to make shrewd, tax-advantaged decisions that can help lower your taxes and grow your wealth.

Tax Center

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