2023 Proposed Regulations under IRC Section 987
IRS Direct File Program Comes to Texas

Hold Your Horses

By Janet C. Hagy, CPA-Austin

 

It looks like tax season may get delayed (current IRS funding runs out March 7) and even more complicated due to the pending legislation H.R.7024, Tax Relief for American Families and Workers Act of 2024. There are two provisions in the bill that would be potentially retroactive to 2023. On the table are the extension of deductibility of Section 174 domestic research and development (R&D) expenses and the extension of 100% bonus depreciation deduction, through Dec. 31, 2025.

 

With these potential changes to the 2023 rules, requesting extensions of time to file returns for taxpayers who might benefit from these changes should be considered. Of course, that brings the correct amount of tax to pay by the due date into question. If the legislation fails to pass and taxpayers base their extension estimates on taking these extra deductions, tax could be underpaid with resulting penalties and interest.

 

R&D expenses are an either/or deduction based on whether we follow current law or bank on the legislation passing.

 

We do have some ammunition to consider regarding depreciation deductions. Bonus depreciation is not limited by net income. This made it more desirable than taking a Section 179 deduction. But whether the legislation passes or not, combining the two types of accelerated depreciation deductions in a tax year may be advantageous for many clients.

 

Here is a recap of what depreciation limits we currently have for 2023.

 

Under Section 168(k), property eligible for bonus depreciation gets a deduction of 80% of cost with the remaining 20% depreciated over the remaining life of the asset. The deduction does not phase out and it is not limited to net income, thereby creating possible net deductible losses.

 

Section 179 is limited to $1.16 million and phases out between $2.89 and $4.05 million of investment. Section 179 is also limited by net income and cannot create a loss. More asset classes are eligible for Section 179 depreciation, such as HVAC and roofs on commercial business property. Section 179 depreciation carryovers are also 100% deductible in the subsequent year subject to the net income limitation.

 

Basis limitations and state law differences must also be considered in determining the tax effect of depreciation deductions.

 

Since 100% bonus depreciation became an option, Section 179 has not been utilized as frequently. But with the 20% haircut of bonus depreciation and the extended period for depreciation of this remainder, electing Section 179 may be a better alternative. Even if the client cannot use all the Section 179 amount, the carryover could potentially be used in full in the subsequent year versus depreciating the 20% haircut over the remaining life.

 

Claiming bonus depreciation on some assets and Section 179 on others allows us to dial in the deduction that creates the best tax option for the client. Very small businesses may not want to show a big loss they cannot use in the current year or that negates the benefit of certain individual tax credits. For example, the unusual purchase of a large piece of equipment may create a better tax benefit over time by claiming a lesser percentage of the cost with a Section 179 deduction, rather than the fixed 80% bonus depreciation deduction.

 

Be sure to review the restrictions for electing Section 179. In addition to net income, basis and state limitations, certain entities like estate and trusts cannot make the election. Also, passive investors in a trade or business cannot deduct Section 179 expenses even if it is allocated to them on their Form K-1. 

 

Hopefully, Congress will finalize the legislation soon. No matter what the outcome, more professional time is going to be spent evaluating depreciation options this tax season.

 

Tax Expert: Timing of Tax Deal Bill May Impact Taxpayer Decision on When to File (thomsonreuters.com)

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