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Buy equipment now to optimize new tax benefits

On December 17, 2010 President Obama signed into law the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010. While the media has focused most of its attention on the fact that the Act extends unemployment benefits and the Bush-era tax cuts, it should be noted that it also includes some business investment incentives that may save you significant money on your company’s tax bill for 2011. As always, we strongly urge that you consult with your accountant before making any decision that may impact your tax liability.

Section 179 Equipment Expense Deduction

Previous legislation allowed small businesses to deduct up to $500,000 in new or used equipment purchases for the tax years beginning in 2010 and 2011. That legislation lowered the deduction to $25,000 for tax years beginning in 2012. The 2010 Act maintains the $500,000 deduction for 2010 and 2011 and increases the expensed amount from $25,000 to $125,000 for 2012. Taxable years beginning after 2012 will see the Section 179 deduction reduced to $25,000.

100 Percent Bonus Depreciation for 2011

The current 50 percent bonus depreciation for new equipment purchases was set to expire December 31, 2010. The Act extends the 50 percent bonus depreciation through the end of 2012. In addition, the Act allows small businesses to elect to take 100 percent bonus depreciation on new equipment put into service after September 8, 2010 and before January 1, 2012. New equipment that you purchase in taxable year 2012 will be eligible for 50 percent bonus depreciation.

The Section 179 and bonus depreciation deductions can be used together. For example, if you spend $800,000 on equipment for 2011 you can expense $500,000 in equipment purchases and fully depreciate the remaining $300,000 (as long as you purchased at least $300,000 in new equipment). If you’re in a 35 percent tax bracket, this will save you $280,000 in taxes for 2011.

Is there a benefit to taking the 100 percent bonus depreciation over the Section 179 deduction? This again is a question that you should discuss thoroughly with your accountant. While the Section 179 deduction is limited to $500,000, there is no limit to the amount of the bonus depreciation. If you were profitable in 2009 or 2010 or both and paid taxes, there may be a benefit to taking the bonus depreciation. Consider that if the amount of the bonus depreciation exceeds your profits you may elect to report a net operating loss (NOL) for taxable year 2011. A NOL can be carried back over the last two taxable years. This would result in an immediate tax refund for the prior years.

Spend some time speaking with your accountant about these incentives. Based on their advice 2011 may be a great year to purchase equipment.

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