When the economy hit the skids in 2008, Congress significantly expanded a pair of first-year depreciation deductions as an incentive to businesses. The goal was to induce spending on capital equipment by allowing considerable first-year tax deductions.
To help small businesses quickly recover the cost of capital outlays, small business taxpayers can elect to write off certain types of property expenditures this year instead of recovering them through depreciation. Under the Small Business Jobs Act, the write-off limit has been increased from $250,000 to $500,000 for 2011. The Section 179 depreciation election provision will be reduced significantly, to $125,000, in 2012 unless Congress approves further increases to help further stimulate the economy.
The depreciable property is generally limited to new tangible equipment that is acquired for use in a business. Depreciable personal property that is not eligible for a Section 179 deduction is still deductible over a number of years through MACRS depreciation of the IRS code. Businesses need to take advantage of this Section 179 deduction for tax purposes.
The Section 179 rules for 2012 were set to return to $25,000, with a phase-out threshold of $200,000. The Tax Relief Act increased the maximum Section 179 deduction for 2012 to $125,000.
The 179 election is not mandatory, and the eligible property may be depreciated according to Sections 167 and 168, if preferred for future tax reasons. The 179 election may be made only for the year the equipment is placed in use and is waived if not taken for the year.
The tax relief act also extended 100 percent bonus depreciation for assets placed in service in 2011. New and used assets placed in service during 2012 will only qualify for 50 percent bonus depreciation. Currently, the tax law does not extend bonus depreciation past December 2012.
Not only will Section 179 deductions shrink beginning in 2012, but fewer small businesses will have access to this write-off. During 2011, the deduction phases out only if the taxpayer’s eligible purchases exceed $2 million, but starting in 2012, the phase-out threshold is $500,000.
So if your company is considering any equipment acquisition, you had better act soon to take advantage of Uncle Sam’s incentives.
The eligibility rules for the Section 179 deduction and the bonus depreciation are confusing at best. If you plan to take advantage of the larger first-year deductions by making significant capital expenditures either in 2011 or 2012, consider having your tax advisor compute your actual deduction and the method of financing any equipment.