Big Depreciation Deductions-Take Them While You Can!

Posted on: October 24, 2011 4:19 pm
Tags: Depreciation deductions business 2011

Businesses in the know are enjoying unprecedented depreciation deductions for qualifying asset purchases.  Unfortunately, these historic deductions are currently set to expire at the end of the 2011.  We will highlight some planning ideas here, and would be glad to answer any questions these ideas might evoke or further explain the details of them.

First, let me say that this is not the final word on deductions for 2011.  President Obama has sent the “American Jobs Act of 2011” to Congress and with two months left before yearend, there will surely be some additional changes.

If you have made qualifying asset purchases this year such as equipment, furniture, computers, etc., you will be able to write those assets off through depreciation much more rapidly in 2011 than 2012.  If you are trying to decide whether to make asset purchases before yearend or not, this information may help with the decision.  There is a 100% write-off, referred to as “bonus depreciation”, for qualified property placed in service before January 1, 2012 (Jan. 1, 2013 for certain aircraft and long-production-period property).  This write-off percentage drops to 50% in 2012.  The 100% bonus depreciation is allowed regardless of when during the year the asset is purchased.  What this means is that you could make the purchase on December 27 and still depreciate the entire amount provided you placed the asset into service. 

There are three qualifications for 100% bonus depreciation of an asset purchase.  First, the asset, such as those listed above, must be fairly short lived and have an IRS determined life of 20 years or less.  The asset may also be computer software other than customized computer software, qualified leasehold improvement property or certain water utility property.  The second qualification is that the asset is placed in service after September 8, 2010 and before January 1, 2012 (Jan. 1, 2013 for certain aircraft and long-production-period property).  And the final requirement is that the property’s original use begins with your business which generally means a new asset.  Converted property can also satisfy the original use component if it was new to you as a personal use asset but then was converted to business use.  An example of this would be your new pickup truck used for personal driving, that after a year you started using exclusively for your landscaping business.  Reconditioned property can also satisfy the original use requirement if it is in the form of additional capital expenses to recondition or rebuild an asset you already own.  If you purchase a reconditioned or rebuilt asset, it will not qualify for the 100% bonus depreciation.  Qualified restaurant property and qualified retail improvement property are not qualified property for purposes of the 100% bonus depreciation deduction either.

For vehicles, heavy SUV’s are also included in the 100% bonus depreciation deduction, subject to certain qualifications.  Heavy SUV’s are those built on a truck chassis and weighing more than 6,000 pounds, making them exempt from the luxury-auto dollar caps.  The SUV must also be otherwise qualified property and business use must be greater than 50%. 

One caution to taking the 100% bonus depreciation in 2011 has to do with net operating loss carryforwards from prior years.  If you experienced losses in past years and elected to carry those forward to offset future taxable income, the 100% bonus depreciation may not be the best idea.  This is because the depreciation could reduce your income to less than the available net operating loss carryforward and you would lose the balance of the net operating loss carryforward, while also not having any depreciation to use in 2012.  You and your accountant should review all the options to help determine the best use of depreciation and/or net operating losses.    

Before 100% bonus depreciation came into existence, we used code section 179 to fully write-off assets in one year.  This is still available and most often used when used assets are bought and placed into service.  For 2011, the maximum Sec. 179 expensing deduction is $500,000 and is reduced (phased-out) once you purchase over $2,000,000 in assets.  The maximum deduction will drop to $125,000 for 2012, and the phase-out will begin at $500,000. 

Section 179 expensing is limited to the taxable income from all your trades or businesses, so if the business for which the asset was purchased does not have net income or enough net income to absorb all the expense, but you have other business activities that do, it is possible that you will be able to use the expensing election in the current year.  Also any unused amounts can be carried forward to be used in future years.  You might consider taking advantage of 2011’s higher expensing allowance by electing to expense the asset in 2011 and having the larger amount available to carry forward for future years expensing. 

The Small Business Act of 2008 carved out a limited time exception for 2010 and 2011 only, allowing for up to $250,000 of qualified real property to be expensed as Section 179 property.  After 2011, the real property will have to be depreciated over a 39 year period, a return to prior treatment.  Qualified real property as defined for this purpose is qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property.  The property must be depreciable, be acquired for use in an active trade or business, and cannot be ineligible property.  These rules get complicated so if you feel that you may have purchased property that could meet these requirements, please call us so that we can discuss the specific requirements for possibly expensing your property.  Since this election is also a Sec. 179 expensing election, it will be combined with other assets purchased during 2011 in regards to the limit on expensing as well as the beginning phase-out amount.  Lastly, there is no carryover to future years for an unused expensing deduction for real property

Depreciation is just one of the possible deductions available to businesses for 2011.  There are many more deductions and credits which are not expiring in 2011 that may also be available to your business.  Getting the full advantage of these deductions and credits may take some planning, but it can be well worth the time in current tax savings as well as increased future deductions.