Maximizing depreciation deductions in an uncertain tax environment

For assets with a useful life of more than one year, businesses generally must depreciate the cost over a period of years. Special breaks are available in some circumstances, but uncertainty currently surrounds them:

Section 179 expensing. This allows you to deduct, rather than depreciate, the cost of purchasing eligible assets. Currently the expensing limit for 2014 is $25,000, and the break begins to phase out when total asset acquisitions for the year exceed $200,000. These amounts have dropped significantly from their 2013 levels. And the break allowing up to $250,000 of Sec. 179 expensing for qualified leasehold-improvement, restaurant and retail-improvement property expired Dec. 31, 2013.

50% bonus depreciation. This additional first-year depreciation allowance expired Dec. 31, 2013, with a few exceptions.

Accelerated depreciation. This break allowing a shortened recovery period of 15 — rather than 39 — years for qualified leasehold-improvement, restaurant and retail-improvement property expired Dec. 31, 2013.

Many expect Congress to revive some, if not all, of the expired enhancements and breaks after the midterm election in November. So keep an eye on the news. In the meantime, contact us for ideas on how you can maximize your 2014 depreciation deductions.

Watch out for the Wash Sale Rule

If you’ve cashed in some big gains this year, consider looking for unrealized losses in your portfolio and selling those investments before year end to offset your gains. This can reduce your 2014 tax liability.

But if you want to minimize the impact on your asset allocation, keep in mind the wash sale rule. It prevents you from taking a loss on a security if you buy a substantially identical security (or an option to buy such a security) within 30 days before or after you sell the security that created the loss. You can recognize the loss only when you sell the replacement security.

Fortunately, there are ways to avoid the wash sale rule and still achieve your goals:

Immediately buy securities of a different company in the same industry or shares in a mutual fund that holds securities much like the ones you sold.
Wait 31 days to repurchase the same security.
Before selling the security, purchase additional shares of that security equal to the number you want to sell at a loss; then wait 31 days to sell the original portion.

For more ideas on saving taxes on your investments, please contact us.