Deduct, Don’t Depreciate

 In Taxes

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 focused mainly on personal income and estate tax. Nevertheless, some additional provisions may be helpful to businesses.
In particular, the new law enhances the Section 168(k) bonus depreciation provisions by temporarily allowing 100% first year bonus depreciation of new business equipment that qualifies for bonus depreciation. That is, a company that purchases qualifying depreciable assets may deduct the entire cost of the assets right away. First-year deductions will immediately boost a company’s cash flow, compared with taking depreciation deductions over several years. No limits exist on the amount of qualifying equipment purchased that is eligible for the 100% deduction.
This 100% deduction provision is effective for qualifying equipment placed in service from September 9, 2010, through the end of 2011. As a result, any company or self- employed individual who has bought or might buy business equipment has several sets of rules to consider.
One law passed in 2010 set permitted first-year Section 179 deductions (expensing) at $500,000 worth of equipment. The phaseout threshold was set at $2 million, meaning that companies buying more than $2 million of equipment in 2010 lost some expensing opportunities. Thus, you might be able to use Section 179 expensing for up to $500,000, for equipment placed in service by September 8, and Section 168(k) 100% bonus depreciation for equipment placed in service after that date last year.
For 2011, equipment purchasers can use either expensing ($500,000 limit, $2 million phaseout threshold), 100% bonus depreciation, or some combination of the two.
The new law also calls for 50% bonus depreciation in 2012, along with a $125,000 limit for expensing and a $500,000 phaseout threshold.
The bottom line? The interaction of these two code sections (Section 179 expensing and Section 168[k] bonus depreciation) provides opportunities as well as complications. Our office can help you decide how to handle those decisions on your 2010 tax return (amended, if necessary) and plan for equipment purchases over the next two years.