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In reaction to the recession, Congress enacted several tax incentives.  They have extended some into 2012, but at reduced amounts.  With the economy gradually recovering and the budget pressures greater than ever, our expectation is that these 2012 limits signal the end of large up-front depreciation deductions.

Bonus Depreciation

Starting in 2008, through most of 2010, the deduction for bonus depreciation was 50% of the cost of new assets. For assets acquired and placed in service after 9/9/10 through 12/31/11, the deduction moves up to 100% of the total initial cost. However, for 2012 the bonus depreciation deduction reverts back to the lower 50% rate. Presently, the tax law does not extend bonus depreciation after 12/31/12, and given current outlooks, it appears that an extension is unlikely.

To qualify for bonus depreciation, the asset must be new property (not used) and must have a depreciable life of 20 years or less. Virtually all tangible personal property (such as autos, trucks, machinery, and equipment) has a depreciable recovery period of 20 years or less, and accordingly all are eligible.

Section 179 Deduction

For most of the past decade, the Section 179 deduction was maximized at just over $100,000. When the recession hit, Congress increased the limit to $250,000, but later increased it again to $500,000 for tax years beginning in 2010 and 2011. More recently, Congress indicated that for tax years beginning in 2012, the Section 179 deduction would drop back to a $125,000.

Not only will the Section 179 deduction shrink, but fewer small businesses will have access to this write-off. During 2011, the deduction phases-out only if a taxpayer’s eligible Section 179 asset purchases exceed $2 million. Starting in 2012, the phase-out threshold is $500,000.

The Section 179 deduction applies to both new and used asset additions. It applies such assets as machinery, equipment and software.  For 2011 only, up to $250,000 of qualified real property improvements apply. Qualified real property improvements include improvements to restaurant buildings and interiors of retail and leased nonresidential buildings. It is generally not available to landlords who purchase or construct assets that are used by a tenant.

If you are planning on taking advantage of major purchases or improvements while these large allowances are still in the tax law, we recommend that you have a detailed depreciation projection prepared. These depreciation incentives can shelter a significant amount of income, but the eligibility rules can be tricky.  We cannot stress enough, the importance of an accurate projection of allowable deductions that can be structured to largely reduce income in the year of purchase.  If you feel that you or your company can take advantage of these deductions, please to not hesitate to contact us at Gunnip & Company for a consultation.