Between recently enacted tax legislation and changes made earlier in 2010, there are a number of changes that will impact business tax filings in 2010. Some of the major recent changes involve cost recovery and utilization of tax credits. After much debate, the bill was signed into law by President Obama on December 17, 2010.
Many of these recent changes are very taxpayer friendly.
What are some recent changes in tax law regarding depreciation and cost recovery?
First, as a result of the most recent law change, bonus depreciation has been extended through 2011. You will need to separate your 2010 capital expenditures into two categories.
- Qualifying assets placed in service on or before September 8, 2010 will be eligible for 50 percent bonus depreciation.
- Qualifying assets placed in service after September 8, 2010 and before December 31, 2011 will be eligible for 100 percent first year depreciation.
Qualifying assets are generally shorter-lived assets such as computers, machinery, furniture and fixtures, and some leasehold improvements. Real property, such as buildings, will generally not qualify. In addition, it is limited to new property. Used property can be deducted under Section 179.
If I bought a new five-year piece of property before September 8, 2010 for $2 million, under
current law, I can take a $500,000 deduction on my tax return from Section 179. Now I have $1.5 million remaining to deduct over some period. I get 50 percent of that as bonus depreciation: $750,000. Now I have $750,000 left, and I can take regular depreciation on that. Regular depreciation on a five-year asset at $750,000 is $150,000. That leaves $600,000.
So in year one, I deducted $1.4 million of $2 million. If this same property is purchased after
September 8, 2010 and before December 31, 2011, I could take a $2 million deduction.
Companies looking to make significant capital expenditures of new property in the coming year should consider accelerating 2012 expenses into 2011 to take advantage of this new law. But, many states may not allow either the 50 or 100 percent bonus depreciation.
Second, the Section 179 deduction has changed. Unlike bonus depreciation, Section 179 is allowed for both new and used property. Under the old law, you could deduct an immediate
expense for an asset purchase of up to $250,000. The phase-out began at $800,000 — once you spent more than $800,000, you had to reduce that $250,000 deduction dollar-for-
dollar. For 2010 and 2011, they raised the phase-out to $2 million and they increased the expense deduction to $500,000.
These rules can be tricky. Generally, the best planning is to maximize allowable Section 179 deduction on purchases on or before September 8, 2010 and all ‘used’ property, then utilize the 50 or 100 percent bonus depreciation to maximize your tax deductions.
Click here to read more frequently asked questions about tax law changes and post a comment below or contact our Tax Planning & Preparation Team at 440-449-6800 with any questions.