Q: I have a few questions about my office finish out and the tax treatment of some of my expenditures as I expand my office space. I am expecting to pay around $17,000 for improvements to the office (a couple new walls and doors, carpeting, etc.). Is that deductible or is all amortized over the life of the lease? I am also likely going to need quite a bit of new furniture. I have a business line of credit, but I do have the cash to just pay for everything. Which would be better?
A: Anytime you buy “fixed assets” (assets that have a greater than one year life) like furniture, computers, equipment, or leasehold improvements, the tax code says you should “capitalize” the assets and depreciate the cost over the life of the asset. You should record the fixed assets on your balance sheet and then record depreciation to recover the cost over the next few years.
Your first task will be to properly classify your purchases since the various assets will have different useful lives. For example, for tax purposes computers and most office equipment are deemed to have 5 year lives, furniture is assigned a 7 year life, and many leasehold improvements are assigned a 15-year life, although sometimes the life can be as long as 27½ years or even 39 years. These lives are written into the tax code and it really doesn’t matter what the true life of the asset is expected to be. You do have to be careful with what you consider leasehold improvements since some of these assets may qualify for a shorter depreciable life which will speed up your depreciation on the asset. There are professionals who make a living helping businesses get these classifications correct, so seek help if you have questions.
Generally Accepted Accounting Principles (GAAP) normally requires a “straight-line” method of depreciation – taking an equal amount of the total cost over the life of the asset. But for tax purposes, you may use an accelerated method of depreciation that speeds up the tax deduction. The annual depreciation percentages are outlined in the tax code and many special rules and conventions apply.
There is a section of the code (Section 179) that allows you to immediately expense some of your asset purchases, with of course a number of limitations. As the law stands right now you can expense up to $25,000 of qualified fixed asset purchases in 2014 (again, with certain limitations). This Section 179 limit was $500,000 in 2013 and is one of the tax benefits that Congress plays with each year. Most tax professionals expect that after the elections in November, Congress will increase this $25,000 to a much higher amount – maybe $250,000, maybe $500,000, maybe some other amount. I have retired from the practice of predicting what Congress will do so I can only wait to see what will happen.
In the last few years Congress has also allowed “bonus depreciation” of 50 percent or even 100 percent of the cost of new property. This special allowance expired at the end of 2013, but it is possible it may come back. Interestingly enough, our Idaho legislature annually passes a bill to conform Idaho tax law to the Internal Revenue Code, but for some reason they don’t like bonus depreciation. So if you used bonus depreciation after 2009 on your US tax returns, you had to separately calculate depreciation for your Idaho tax returns. (I asked one of our state representatives why they don’t permanently conform Idaho tax law to US law and I was told “We just don’t do that.”)
As far as paying cash versus financing the purchases, it really doesn’t matter from a tax perspective, other than being allowed to deduct all the interest you pay if you finance. The rules above will govern the deduction of the cost of the asset regardless of how it is purchased. You will have to evaluate your need for new equipment versus your cash flow to decide whether paying cash or financing is the best course of action.
So that is a very long answer to what should be a simple question. When I am finally made King of Tax one of my first acts will be to greatly simplify the rules surrounding depreciation. Until they make me King of Tax we have to use the current laws, which certainly will change before the end of the year…maybe.
Peter Robbins is a principal in the Boise office of CliftonLarsonAllen, LLP specializing in tax matters for small businesses, individuals, and trusts and estates. CliftonLarsonAllen, LLP is one of the ten largest public accounting firms in the nation offering unprecedented emphasis on serving privately held businesses and their owners, nonprofits, and governmental entities. The answers in this column are meant to offer general information. You should consult your tax advisor regarding the specifics of your situation.
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