Unless you are a tax attorney, changes to IRS regulations probably don’t often get much of your attention.
But for small law firm partners, a dramatic change to one section is going to have a major impact on your tech buying decisions for this year. IRS Section 179 is the section which allows assets to be depreciated as an operating expense in the current year. The important change to this code is that the maximum expense you can depreciation as a capital asset under Section 179 has been reduced from $500,000 to a mere $25,000. In addition, deductions were previously phased out as your property purchases exceeded $2 million. Beginning this year, the Section 179 phase-out level will begin at $200,000.
The Tax Code Gets Stingy
Why is this important? That means if you spent $80,000 last year on a software system, you could depreciate the whole thing that year. Now you can take just $25,000 in 2014 and must depreciate the rest of the cost over the following four years. However, we should note that the entire cost of an on-demand or subscription-based, cloud software can be fully deducted 1 year as a business expense. Just as importantly, this cost is often charged through to end clients as a pass through cost.
Examples of tangible personal property that qualify under Section 179 include computers, business equipment and machinery, office furniture, and software. Examples of items you cannot deduct under Section 179 include the cost of land, permanent structures attached to land (buildings, fences, etc.), and intangible assets.
There is talk that the White House would like to see the limits loosened, but given the partisan rancor in Washington, it is unlikely this figure will change significantly. Of course, none of the following is considered tax advice. You should consult your CPA or tax advisor before making any decisions.