Business Tax Incentives
“Bonus” First-year Depreciation
In
most cases, taxpayers must recover the cost of
assets used in a trade or business or for the production
of income through annual depreciation deductions
on their tax returns. Deductions must be spread
out, whether the taxpayer pays cash or finances
the purchase.
The amount of the annual depreciation deduction is usually determined using a series of rules called the modified accelerated cost recovery system (MACRS). To figure the deduction for a particular item, one must know not only the property’s adjusted basis, but also the recovery period, depreciation method, and placed-in-service convention applicable to that type of property under MACRS. Various IRS regulations and procedures spell out the rules.
Previous tax laws gave businesses an opportunity to significantly increase their first-year depreciation deductions by introducing, for a limited time, an additional first-year depreciation “bonus” equal to a percentage of the adjusted basis (essentially, the cost) of qualified property. The bonus percentage was set at 50% of adjusted basis. The additional depreciation deduction was allowed against both regular income tax and AMT. Several requirements had to be met for property to qualify for “bonus” depreciation. Most types of new business property qualified, other than buildings. Bonus depreciation applied to qualified property unless the taxpayer “elected out” for that property’s class or classes for that taxable year.
Pre-2009 Act law provided that the bonus first-year depreciation would no longer be available for property placed in service on or after January 1, 2009. (There was an extension through the end of 2009 for longer-recovery-period property and certain transportation-related property.) But, now, the 2009 Act extends the additional first-year depreciation deduction for another year, generally for property placed in service through 2009 (through 2010 for certain longer-lived and transportation property).
Section 179 Expensing
Smaller businesses can take advantage of an election under Section 179 of the tax code to write off the cost of many types of otherwise depreciable assets in the year they are acquired and placed in service, within tax law limits. This Section 179 election generally allows taxpayers to recover their costs faster than through depreciation deductions.
EXAMPLE:
In 2008, Acme Corporation had taxable income of
$150,000 (before any Section 179 deduction). For
the year, Acme purchased and placed in service
$50,000 of computers and other equipment used
in the business. No other assets were purchased
during the year. Acme may choose to depreciate
the assets over their depreciable lives. Or Acme
may elect under Section 179 to write off the entire
$50,000 cost of the assets for 2008.
The tax law sets a maximum dollar limit on the cost of property eligible for the Section 179 election. That maximum is reduced dollar-for-dollar as the cost of the taxpayer’s total qualifying assets placed in service during the year exceeds a certain dollar amount.
Pre-2009 Act tax law provided that, for taxable years beginning in 2008, the maximum amount a taxpayer could expense under Section 179 was $250,000. But, for taxable years beginning in 2009 and 2010, the limitation was reduced to $125,000, adjusted for inflation. (The 2009 inflation-adjusted limit was $133,000.)
Also, for taxable years beginning in 2008, the $250,000 amount was reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeded $800,000. For taxable years beginning in 2009 and 2010, this ceiling was $500,000, adjusted for inflation. (The 2009 inflation-adjusted ceiling was $530,000.)
The 2009 Act extends the enhanced Section 179 expensing limit that was in effect for 2008 to 2009. So, for qualifying property placed in service in taxable years beginning in 2009, there is a $250,000 maximum Section 179 deduction. The deduction maximum is reduced to the extent the cost of qualifying property placed in service during the taxable year exceeds $800,000. Neither limit is adjusted for inflation.
EXAMPLE:
During 2009, Acme Corporation buys and places in
service $700,000 of qualifying property. Acme’s
taxable income (before any Section 179 deduction)
is $1.5 million. Acme can expense up to $250,000
of the property’s cost. The remaining $450,000
of the purchases is subject to regular depreciation
and may be eligible for bonus first-year depreciation.
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