Revisiting Post-JGTRRA sec. 179.The expensing election under Sec. 179 was overhauled by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA JGTRRA Jobs and Growth Tax Relief Reconciliation Act of 2003 ). For tax years beginning in 2003-2005, the annual deduction limit and the qualifying investment limit were increased substantially; thus, more small businesses should qualify for the deduction. The Joint Committee on Taxation has estimated that these changes will provide about $8 billion of tax relief over the three-year period; see Joint Committee on Taxation, "Estimated Budget Effects of the Conference Agreement for H.R. 2, The 'Jobs and Growth Tax Relief Reconciliation Act of 2003,' Fiscal Years 2003-2013" (5/22/03). Thus, it is a good trine to review the basic rules and some planning strategies. JGTRRA Changes Under Sec. 179(d)(1), tangible personal property and off-the-shelf computer software purchased and used in the active conduct of a taxpayer's trade or business are now eligible for the election. "Off-the-shelf" computer software is that which is readily available for purchase by the public, has not been altered substantially and is subject to a nonexclusive license. Previously, the cost of such software had to be amortized over 36 months. The Sec. 179(b)(1) annual deduction ceiling increased from $25,000, to $100,000 for 2003 and to $102,000 for 2004. The Sec. 179(b)(2) investment ceiling increased from $200,000, to $400,000 for 2003 and to $410,000 for 2004; see Temp. Kegs. Sec. 1.179-2T. Both the $102,000 and $410,000 ceilings will be indexed for inflation for 2005. Other Rules Phaseout phase·out n. A gradual discontinuation. : To the extent a taxpayer exceeds the investment limit for any tax year, the maximum allowable Sec. 179 deduction for that year phases out, dollar for dollar. Thus, if the qualified property placed in service in 2004 equals or exceeds $512,000, no Sec. 179 election would he available. The disallowed amount is capitalized and depreciated Depreciated may refer to:
Income limit: The taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. limit has not changed; under Sec. 179(b)(3) and Regs. Sec. 1.179-2(c)(1), the deduction is limited to taxable income, computed without the Sec. 179 deduction, any net operating loss operating loss The excess of operating expenses over revenue. As with operating income, operating losses exclude revenues and expenses from operations that are not considered a regular part of the business. Also called deficit. Compare operating income. carryback or carryforward and the deduction for one-half of self-employment tax Self-Employment Tax A tax imposed on self-employed people, who must pay this tax in order to receive social-security benefits upon retirement. Notes: The self-employment tax may be reduced if the person also pays social security and Medicare taxes through another employer. . However, for S corporations and partnerships, taxable income as reported on the entity's tax return can be increased for a shareholder-employee's compensation and guaranteed payments, for purposes of this limit. Carryforward: According to Sec. 179(b)(3)(B) and Regs. Sec. 1.1793(a), any portion of the Sec. 179 deduction disallowed dim to the taxable income limit can be carried forward to future years.The taxpayer has the option of selecting the specific assets for which the costs are carried forward. If no selection is made, the carp/forward is apportioned ap·por·tion tr.v. ap·por·tioned, ap·por·tion·ing, ap·por·tions To divide and assign according to a plan; allot: "The tendency persists to apportion blame as suits the circumstances" equally among the qualifying property for which the Sec. 179 election was made for the tax year. However, an asset's basis for depreciation purposes is reduced for the amount of the Sec. 179 carryforward. If the taxpayer disposes of the asset before the carryforward is fully used, its basis is increased by the undeducted carryforward. Passthrough treatment: An additional hurdle for passthrough entities is that each limit (i.e., the annual deduction ceiling, the investment ceiling and the taxable income limit) applies at both the entity level and at the taxpayer level; see Sec. 179(d)(8) and Kegs. Sec. 1.179-2(c). To avoid separate testing at the entity level, a start-up business with a single owner should consider forming as a sole proprietorship A form of business in which one person owns all the assets of the business, in contrast to a partnership or a corporation. A person who does business for himself is engaged in the operation of a sole proprietorship. or single-member limited liability company. Planning Tips To maximize the total Sec. 179 and depreciation deductions for a tax year (and, thus, minimize taxable income), a taxpayer should select eligible property with the longest recovery period first for the Sec. 179 election. Also, during the 2004 tax year, used property should be selected before new property, to maximize the total benefit of Sec. 179 and the 30%/50% (expiring after 2004) bonus depreciation allowance. While both new and used property qualify for the Sec. 179 election, only new property qualifies for bonus depreciation. If the annual deduction appears to be limited because purchases exceed the investment ceiling, the tax adviser should check that property "purchased" was actually "placed ill service." Only eligible properly placed in service should be included in the investment ceiling. Also, strategically selecting assets to place in service in the fourth quarter for the election can avoid the mid quarter depreciation convention. Finally, if in hindsight, a Sec. 179 election was a bad idea, JGTRRA Section 202(e)'s amendment to Sec. 179(c)(2) allows the tax payer to revoke the election, in tax years 2003-2005, via an amended return Amended Return A return filed in order to make corrections to a tax return from a previous year. It can be used to correct errors and claim a more advantageous filing. Notes: An amended return is filed using Form 1040X. and without IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. consent. Conclusion Due to the JGTRRA's changes to Sec. 179, tax advisers need to be aware of the varying effective dates and the revised definitions of qualified property. With the potential for additional tax savings, tax planning Tax planning Devising strategies throughout the year in order to minimize tax liability, for example, by choosing a tax filing status that is most beneficial to the taxpayer. becomes even more important. To properly perform such planning, one must understand the interrelationship in·ter·re·late tr. & intr.v. in·ter·re·lat·ed, in·ter·re·lat·ing, in·ter·re·lates To place in or come into mutual relationship. in of the old and new rules. FROM FRANK E. BRODNAX, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , AND BERNARD FLEISHMAN, CPA, ELLIN & TUCKER, CHARTERED, BALTIMORE, MD |
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