What are the new Section 179 expensing and bonus depreciation rules for 2013?

As a business owner, you may have faced the prospect of losing two important tax-saving provisions as part of the fiscal cliff: the temporarily expanded Section 179 expensing limits and the 50 percent first-year bonus depreciation rule. The increased deduction limits were originally enacted several years ago–and subsequently extended and modified a few times since–to help businesses weather the prolonged economic slump. The premise was that the tax perks would encourage businesses to make purchases, giving a boost to the overall economy.

As part of the American Taxpayer Relief Act of 2012, these provisions were once again extended, and the Section 179 deduction was enhanced for both 2012 (retroactively) and 2013.

Section 179 rules now state that for both 2012 and 2013, businesses can expense purchases of up to $500,000 for new and used equipment, up to a maximum investment of $2 million for the year. Any purchases over that $2 million limit reduce the allowable deduction amount on a dollar-for-dollar basis. The idea here is that the provision is designed primarily to benefit small and medium-sized businesses.

But businesses that make purchases over the $2 million limit have a reason to invest, too. The bonus depreciation deduction means business owners can speed up their depreciation tax benefits by taking a first-year deduction of 50% of the cost of new equipment only (i.e., purchases of used equipment are ineligible). To take advantage of both the Section 179 deduction and the bonus depreciation, a business would typically max out its Section 179 expense first and then apply the 50% bonus depreciation to remaining purchases. Companies that experience net operating losses may also take the 50% bonus depreciation deduction, carrying the loss forward if needed.