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As the end of the year approaches, cash-basis businesses will begin to look for ways to reduce their taxable profits for the year. Thanks to some very liberal tax laws written to encourage investment in personal tangible equipment, including information technology (IT) equipment, many businesses will be able to expense (write off as a tax deduction) all such purchases in 2017. However, to do so, the IT equipment must be purchased and placed in service before the end of the year, and time is running out. For businesses using the accrual method of accounting, the purchase must be completed and the equipment placed in service before the company’s year-end.

There are a number of ways to deduct IT costs, and the best method should be based upon the need for a current-year deduction. The deductions may be more beneficial in a future year, so careful planning is required.

Here are the 7 possible methods depending on your unique business needs.

  1. Depreciate – The most conservative method of writing off the investment would be to depreciate the various pieces of equipment over the recovery period (useful life), designated by the IRS as being either 5 or 7 years, depending on the individual items. Generally, computers, copiers, and certain technological and research equipment are depreciated over 5 years, while office fixtures, furniture, and equipment are depreciated over 7 years.
  2. Material & Supply Expensing – Capitalization and repair regulations may come into play with what is called material or supply expensing. If an item costs $200 or less, or has a useful life of less than one year, it is expensed rather than depreciated.
  3. De Minimis Safe Harbor Expensing – Another part of the capitalization and repair regulations allows businesses to expense up to $2,500 of equipment ($5,000 if the business has an applicable financial statement). The limits are applied per item or per invoice, which provides a significant amount of latitude in expensing.
  4. Routine Maintenance – The expenditure can be expensed if the purchase is used to keep a unit of property in operating condition and the business expects to perform the maintenance twice during the property’s class life (different than depreciable life). The class life for information systems and computers is 6 years.
  5. Bonus Depreciation – Bonus depreciation allows a business to deduct 50% of the cost of new tangible property with a recovery period of 20 years or less if it is placed in service during 2017. The remaining 50% of the cost is depreciated as usual. Congress is phasing out the bonus depreciation, and the deduction rate has been reduced to 40% for 2018, 30% in 2019, and then nothing in later years.
  6. Section 179 ExpensingSec. 179 expensing allows full expensing of IT equipment purchases. Commonly referred to as the Sec. 179 deduction, for 2017, it allows companies to expense up to $510,000 of personal tangible equipment, including IT equipment, for federal purposes (state limits may be different). There is an investment limit of $2,030,000, which means if the company makes investments into property eligible for Sec. 179 expensing in excess of $2,030,000, the amount allowed to be expensed under Sec 179 is reduced by one dollar for each dollar the investment limit is exceeded. These amounts are inflation adjusted annually, and the amount that can be expensed in 2018 is $520,000.
    1. There are negative factors to using Sec. 179 expensing. If the item is disposed of before the end of its recovery period, the expense deduction is recaptured, to the extent that it exceeds the otherwise allowable depreciation deduction for the period. The recaptured amount is added to the business’s income for the disposition year. For very large companies, the use of Sec. 179 is restricted because of the annual limit.   
  7. Blended Methods – It is possible to use a combination of depreciation, bonus depreciation, and Sec. 179 expensing to achieve just about any result for small businesses.

The alternative minimum tax (AMT) is always a concern. However, bonus depreciation and Sec. 179 expensing are not preference items and will not cause an AMT add-on tax. The only risk of impacting the AMT is if the 200% MACRS depreciation is used, in which case AMT preference income is created in the amount of the difference between 200% of MACRS and 150% of MACRS depreciation.

Choosing the correct expensing method for you business can be a complicated task. Working with an accountant can help ensure you make the right choice.

If the GOP tax reform makes it through Congress, all of the foregoing will be muted because the plan includes unlimited expensing for personal tangible equipment, for a minimum of five years, as an incentive for business expansion. The uncertainty of whether tax reform will actually occur further complicates a business’s decision making as to when to purchase needed equipment.

 

Lee Reams, Sr. EA

 

Lee is the Chief Content Officer for TaxBuzz.com, a nationwide marketplace that connects businesses and taxpayers with five-star reviewed tax professionals. Lee is a nationwide lecturer and author, having written thousands of articles on all things tax.

 


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