Congress has passed numerous tax breaks that are designed to encourage businesses with cash reserves sitting on the sidelines to invest some of those funds in equipment and improvements in 2011.
Section 179 Expensing
In 2011, businesses can immediately expense up to $500,000 in qualified code section 179 property placed in service during the year. This amount is phased out dollar for dollar by the amount of qualifying purchases exceeding $2,000,000. The definition of qualifying property is expanded for 2011 to include not only personal property such as equipment and furniture but also qualified real property (qualified leasehold improvements, qualified retail improvements and qualified restaurant improvements. The option to expense leasehold improvements will not be available after the 2011 tax year. One downside to Section 179 expensing of property and improvements is that it cannot be used to create a loss though unused amounts can be carried forward.
For tax years beginning in 2012, the new law provides for a $125,000 dollar limit and a $500,000 investment limit (both indexed for inflation). Without this provision, the dollar and investment limits would have reverted to $25,000 and $200,000 respectively for tax years beginning after 2011.
For qualified assets placed in service before January 1, 2012, 100% bonus depreciation is another alternative. There are several significant benefits of 100% bonus depreciation over expensing: first, bonus depreciation is not limited in amount and second, bonus depreciation can create a net operating loss to be carried back to prior years and result in an immediate tax refund. Nonetheless, there will be circumstances where Section 179 expensing may be preferred over bonus depreciation. A taxpayer may take any portion of the expensing election as an immediate deduction, whereas bonus depreciation must be taken entirely, or elected out of by class life of property. This will generally be beneficial to taxpayers who need less than $500,000 in write off during the current year. Another point to keep in mind is that section 179 expensing can be taken on new or used property but bonus depreciation is only applicable to new property.
Example: In November, 2011, Sip & Sail, LLC, a calendar year business, buys $1 million of qualifying property eligible for the 100-percent bonus depreciation deduction. Under the 2010 Tax Relief Act’s enhanced 100-percent bonus depreciation provision, Sip & Sail will be able to claim a $1 million depreciation deduction for the property on its 2011 tax return.
Although enhanced 100-percent bonus depreciation is not extended into 2012, the new law does provide 50-percent bonus depreciation for qualified property placed in service after December 31, 2011 and before January 1, 2013.
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