For the last two years about this time, I provided the basic tax depreciation/expense rules that can help salespeople in making new and used equipment sales before year end. Because of some changes, it is timely to revisit these rules.
There are two provisions we need to look at:
Section 179 expense deduction for new and used equipment. The Section 179 deduction for 2013 is $500,000. There is a “phaseout” dollar for dollar after the purchase of $2 million of new and/or used equipment. Thus, if a customer has $2.5 million of purchases in 2013, there will be no Section 179 deduction. This phaseout shows that this deduction is designed for small and midsize businesses.
Bonus depreciation for new equipment. Like last year, the extra additional bonus depreciation is 50% of the purchase price of new equipment. For example, if a customer buys new equipment in 2013 for $600,000, the customer can take an extra $300,000 bonus depreciation deduction in 2013.
Example of combining tax provisions. As the table below shows, the interplay between Section 179, bonus and regular depreciation requires pencil, paper and a calculator. I have provided three scenarios: one showing the purchase of $1,100,000 of new equipment; the second, showing the purchase of $1 million of used equipment; and the third showing the combined purchase of new and used.
The table illustrates these features: a) the $500,000 Section 179 deduction applies to both new and used equipment; b) the Section 179 deduction is reduced dollar for dollar for purchases in excess of $2 million; c) bonus depreciation applies only to new equipment; d) the MACRS “normal” depreciation is computed on the residual basis after reduction for the Section 179 deduction and the 50% bonus depreciation.
The table shows that in these three specific situations: a) 77% of the $1,100,000 purchase price for the new equipment can be written off in 2013; b) 57% of the $1 million of the used equipment; and c) 42% of the combined $2,100,000 of the new and used.
Similarly, assuming a combined 40% federal and state tax, the table shows in 2013 this equates to 31% of the purchase price of $1,100,000 of new equipment being “paid for” by tax savings; 23% of $1 million for used; and 17% for the combined $2,100,000 of new and used. Of course, in all three instances, the purchases will save 40% of the purchase price in reduced taxes. It is a matter of timing. The $500,000 Section 179 deduction and 50% bonus depreciation accelerate the tax savings into 2013, which can improve cash flow sooner rather than later.
JACK SELZER is tax attorney with Seigfreid, Bingham, P.C. The firm also serves as legal counsel to the North American Equipment Dealers Association. Selzer may be contacted at email@example.com. Also see www.seigfreidbingham.com.