Section 179 & Bonus Depreciation Expense

Throughout the past several months the nation has been abuzz with talks of the upcoming fiscal cliff whereby, absent intervention by Congress, the Bush tax cuts are set to expire on 12/31.  Two provisions slated to expire, which can have a material impact on business income tax liability, relate to Section 179 and bonus depreciation expense.

What is Section 179?

Section 179 refers to that section of the IRS code which allows business owners to recover all or part of the cost of certain qualifying property in the year the asset is placed into service as opposed to recovering the cost over multiple years in the form of depreciation expense.  Simply stated, Section 179 allows businesses to write-off all or most of the cost of qualifying asset purchases.

Generally speaking, Section 179 applies to most new and used capital equipment and also includes certain software.

Section 179 for 2012 v. 2013        

As a result of the 2010 Tax Relief Act, business owners may write-off up to $139K in Section 179 assets purchased during 2012.  This limitation is subject to a phase-out threshold of $500K, meaning the Section 179 deduction is reduced by the amount that exceeds $500K.  Let’s look at the following example:

ABC Company purchases a qualifying piece of machinery during 2012 for a total cost of $550K.  The amount ABC Company may deduct for Section 179 is $89K, calculated as $139K less the amount in excess of the threshold ($550K less $500K).

Compare this to 2013 whereby the Section 179 expense limit is reduced from $139K to $25K with a phase-out threshold reduced from $500K to $200K.

Assume from the example above ABC Company waits until 2013 to make the same $550K purchase.  In this scenario, Section 179 deduction is $0 due to the reduced limit and phase-out threshold.

What is Bonus Depreciation?

Bonus depreciation is a type of accelerated depreciation which allows a business to deduct additional ‘bonus depreciation’ on qualified assets placed in service.  Bonus depreciation was born in 2008 as a temporary measure to help the ailing economy.  In 2010, the provision was extended through 2012.  Generally speaking, bonus depreciation may only be taken on new equipment and does not include software; however it can be used to create loss situations.

For 2012, businesses are able to take 50% additional bonus depreciation on qualified assets placed in service; however, this provision is set to expire after 2012.

Conclusion

As you can see, these two changes could have a material impact on your business income tax liability.  So if you have recently been thinking about making an asset purchase for your business, now is a great time to consult with your accountant to determine whether you can benefit from the Section 179 and bonus depreciation expense deductions by making that purchase before the New Year rings in.

This article is provided for general information purposes only and should not be relied upon for legal or financial advice. For more details, please contact Michelle directly.

IRS CIRCULAR 230 DISCLOSURE: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact Michelle directly to discuss your specific business needs.