Taxes may not be foremost on your mind right now, but they are important to think about before the year is over. It would be wise to know what kind of changes are coming and how that can affect you. For those in business, including the self-employed, here are two big changes coming for this year’s tax return.
So what is Section 179 anyway? Well, first you need to understand depreciation. If you buy an asset (say, a computer), you are generally not allowed to expense (“expensing” means writing off or deducting) the entire amount in the year that you purchased it. Instead you are supposed to spread out the expense over several years.
So, suppose the computer you purchased cost $1,000. Instead of expensing $1,000 in the year you purchased it, you slowly depreciate the computer by $200 a year for 5 years. The idea is that the cost of the computer should be spread out over its useful life.
Section 179 is an exception to the usual depreciation rules. Section 179 says (with a few more of its own exceptions) that you can expense the entire cost of the equipment in the year that you purchase it. Since 2010, business owners have been able to expense up to $500,000 worth of equipment a year using Section 179.
As the law is currently written as of the publication of this post, the total Section 179 allowable depreciation drops from $500,000 in 2013 all the way down to $25,000 in 2014. Many experts think that Congress will extend the $500,000 limit, but as of December 16, 2013, they have not done so.
Many business owners are purchasing equipment in these latter days of 2013 to take advantage of the higher limit. Section 179 comes with a few rules and limitations (i.e. you can’t take Section 179 for an amount higher than your net income, and there are limitations on vehicles), so please make sure you consult a tax professional.
Home Office Deduction
This change will affect your 2013 tax return. As of 2012, if you were eligible to take the home office deduction, you were required to use what the IRS calls the “regular option”. This means that you calculate the square footage of your office and then divide it by the total square footage of your home. This gives you a percentage of your home that you can deduct for your home office. You can then multiply this percentage by all of your home expenses – utilities, rent, insurance, etc. as well as the normally deductible interest and taxes.
This sometimes gets to be a bit of a pain to keep up with because of a few often-overlooked calculations. When you use this option, you are supposed to allocate the interest and taxes for your home between your Schedule C and Schedule A. Even trickier, you are supposed to depreciate the percentage of your home allocable to the home office AND then recapture that depreciation when you sell your home. This depreciation is supposed to be added back in to the basis of your home even if you didn’t take the depreciation deduction in past years. The IRS kind of sticks it to you there.
However, starting in 2013, the IRS is offering a simpler option. The rules if you are eligible are the same, but once you figure the square footage of your home office (not to exceed 300 sq ft), you are almost done. You are allowed $5 per square foot for your home office, and all other home-related itemized deductions (such as interest and taxes) are deductible in full on your Schedule A – no more allocation between schedules. You don’t have to keep up with your utility bills and all that sort of stuff. Also, you don’t have to fuss with depreciation of your home. It really makes things quite a bit simpler for those that want to take this deduction.
What other tax issues are you considering at the end of the year? Do you currently use the home office deduction?
Kim is a licensed CPA, working at Loggins, Kern & McCombs, CPAs. If you have a tax question that you would like to submit, please click here. Whatever advice you receive, please remember to consult with your own tax professional as issues vary depending on your situation.