Prior to 2007, section 179 was slated to wind down and eventually be eliminated. At the beginning of the economic crisis, section 179 was expanded by the economic stimulus act of 2008 with the purpose of motivating the economy for both businesses and consumers. The provisions were then either expanded or extended through five more tax acts — most recently with the American taxpayer relief act of 2012, which retroactively reinstated the higher limits for 2012 and extended them through 2013. Last year, most small businesses could write off the entire cost equipment, software and vehicles totaling less than $500,000 on their 2013 tax return.
For 2014, that allowance has dropped from $500,000 to $25,000. Additionally, the 50 percent bonus depreciation expires, and the 15-year depreciable life for leasehold and restaurant property increases to 39 years. These expired provisions will likely make it less economical for small and medium-sized businesses to make capital investments this year. While congress could change its mind during the year, the silver lining is that assets purchased in 2014 will have a higher basis in later years. This means there will be more depreciation expense later.
One area that did become easier was computing a deduction for a home office. Beginning in 2013, the IRS established a simpler method for calculating the home office deduction. The deduction is for $5 per square foot with a maximum of 300 square feet, rather than adding actual expenses. The qualifications for a home office deduction remain the same. If you elect to use the simplified method and you itemize your deductions, you will still be able to claim mortgage interest and real estate taxes as qualified home-related itemized deductions.
Small businesses may benefit more from the small business health insurance credit this year, as the credit increases to 50 percent of the employer’s contribution. The business must have 25 of fewer full-time, or equivalent, employees and provide affordable health insurance, while picking up the tab for at least half of the premiums.
Large businesses had their mandatory insurance requirement delayed until 2015, which means some businesses will be spending 2014, searching for affordable coverage and understanding how the health care laws will affect them. Starting next year, companies with 50 or more equivalent full-time employees must offer minimal essential coverage or risk fines from the government.
Even without congress creating last-minute legislation, businesses should discuss their situations with their CPAs or tax consultants to find other areas where they may be able to minimize their tax liability for 2014.