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
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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