The construction and real estate industries are particularly sensitive to the tax laws relating to depreciation and first year expensing (i.e. 179). Over the past several years Congress has continually renewed some generous depreciation and expensing rules. No one can predict what Congress will do next, it is imperative that people in the construction industry understand what depreciation and expensing rules expire in 2013, and what the rules are currently scheduled to be for 2014. After all, while we cannot predict the future, we can plan responsibly.
First, bonus depreciation expires in 2013. Tax practitioners have expected bonus to expire before, and Congress has extended it, but so far, it looks like bonus depreciation will expire in 2013. This means that some of the large expenses companies enjoyed over the past few years will be going away. Instead, with the exception of section 179 expensing for certain companies, new assets will be depreciated on the MACRS (modified accelerated cost recovery system), which depreciates an asset on a slower pace than bonus traditionally has. The silver lining to this scenario is that assets purchased in 2014 will have a higher basis in later years, which means there will be more depreciation expense in later years.
Second, the section 179 expensing limits are retreating to $25,000 in 2014, and the investment limits are falling to $200,000. These 179 limits are in stark contrast to the $500,000 expensing limit and $2,000,000 investment limit taxpayers have had available from 2010 through 2013.
Qualified real property place in service in 2014, which includes qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property, is scheduled to have a much longer depreciable life than in recent years. Under the normal rules, qualified real property has a depreciable life of 39 years, but Congress has allowed for it to be depreciated over 15 years from 2004 to 2012 (or 2008 to 2012 depending on the type of property). Clearly, the depreciable life is going to more than double, which means that the yearly depreciation expense will significantly decrease for qualified real property placed in service in 2014.
Another important consideration for taxpayers is that the section 179 expensing will no longer be available for qualified real property in 2014. From 2010 to 2013, qualified real property was eligible for section 179 expensing, subject to certain limitations. Currently that has not been extended. So, starting in 2014, qualified real property will not be eligible for section 179 expensing.
Energy Efficient Deductions
Finally, the section 179D Energy Efficient Commercial Buildings Deduction is going to be expiring. Essentially, section 179D allows for all or a portion of the cost of energy efficient commercial property that was placed in service to be expensed. To qualify, items had to be certified as energy efficient, depreciable, and part of the lighting system, HVAC, hot water systems or the building envelope. Unfortunately, this special expensing provision is going to expire after 2013.
Ultimately, taxpayers need to be aware of the drastic changes scheduled to occur in 2014. As noted above, ill-advised or unwary taxpayers may be sorely disappointed if they do not prepare for the upcoming changes in depreciation and expensing. Please contact MCM to discuss any questions about both the current depreciation and expensing rules and the new 2014 rules.
Chris Coyle, CPA,