The passage of the American Taxpayer Relief Act extended a number of tax deductions which could benefit small businesses
The American Taxpayer Relief Act, also known as the Fiscal Cliff Bill, was passed at the beginning of 2013 and extended a number of tax deductions, some of which apply retroactively to 2012. There are 31 sections under the ‘Business Tax Extenders’ header of the ATRA, and many of them are only applicable to particular types of business or industry.
The ones most widely applicable are those related to Section 179 deductions. The limit for Section 179 deductions was set to shrink from $500,000 down to $139,000 in 2012, but the ATRA extended the $500,000 limit through 2013, meaning more of major purchases from 2012 can be deducted. Purchases covered by Section 179 include:
Section 179 used to have a reputation for being used by business owners looking to buy SUVs, call them business vehicles, and write them off in their taxes. The law has since changed and there are limitations on what kinds of vehicles can be deducted. Deductions for SUVs, for example, cannot exceed $25,000, while other vehicles like vans with more than nine seats behind the driver, or trucks with a cargo area of at least six feet that is not readily accessible from a passenger compartment, are excluded from the $25,000 limit. If a business had to invest in a fleet of passenger vans or pickup trucks, that investment might be deductible.
2. Office Furniture [pullquote]If major software purchases need to be made, 2013 would be a good year to make them.[/pullquote]
Office furniture counts as tangible property, and normally qualifies for depreciation. However, depreciation requires that the initial cost of the property be recouped over several years – typically seven – in the case of most furniture. Section 179 allows the purchasing business to deduct the cost of the property in the year the business puts it into use and, as the deduction limit has been raised, choosing to deduct the cost all at once might not be a bad idea.
3. Off-the-shelf software
Normally, the cost of off-the-shelf software can only be written-off through depreciation, rather than claimed all at once. However, back in 2002, the Job Creation and Worker Assistance Act was passed which made software eligible for Section 179 deductions. Over the years this allowance has been extended, and most recently the ATRA extended it through 2014. There is no guarantee there will be another extension, so if major software purchases need to be made, 2013 would be a good year to make them.
4. Improvements to retail or restaurant property
Normally, improvements to real property are not applicable for section 179 deductions. But the ATRA extended a provision that expired in 2012 allowing certain improvements to be deducted. In order to qualify, the improvement must be made to retail, restaurant, or qualified leasehold property. Section 168 of the IRS tax code outlines certain restrictions – for example, retailers cannot include the installation of an elevator in their deduction.
As always, it is best to consult with an accountant or other financial professional when preparing taxes. If this isn’t possible and a business made a significant number of purchases in 2012, the owner should go through those investments and see what qualifies for a Section 179 deduction in order to take advantage of the $500,000 limit extension.