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Bonus Depreciation Tax Breaks Make 2011 a Year to Buy

If you are thinking of buying new vehicles, equipment, machinery, phones, computers or other technology for your business, 2011 could be the year to do it.  That’s because not one, but two laws passed late last year have greatly increased the amount of your immediate tax write-off for making such purchases.

The so-called Section 179 deduction limit, slated to revert to $25,000, was increased to $500,000, and the total amount of equipment that can be purchased was increased to $2 million (up from $200,000). This includes most new and used capital equipment, and also includes software.  In addition, bonus depreciation was increased to 100 percent on qualified assets (new equipment only). When applying these provisions, Section 179 is generally taken first, followed by bonus depreciation. 

Bonus depreciation, a special depreciation allowance, is a limited-time tax benefit for business purchases of qualified items during 2011, or in some cases 2012 as well.  Basically, bonus depreciation offers a giant tax incentive for businesses to buy new property and other assets now by allowing you to write off (or “expense” in accounting lingo) the entire purchase (100 percent) immediately rather than having to take those write-offs in little pieces over many years (called depreciation). Normally, businesses recover these types of capital investments through annual deductions spread over as many as 20 years. 

Now 100%:  This provision of the Tax Relief Act passed late last year doubles the amount of bonus depreciation allowed – from half of the purchase cost, to the full amount (100 percent) for this year. That’s up from 30 percent a few years ago. In other words, if you buy some PCs, servers, phone equipment, machinery, or all kinds of other qualifying items, you can take the entire amount as a deduction on your 2011 tax return.   

The temporary rule change also makes 50 percent bonus depreciation available for qualified property placed in service during 2012. Some long-lived property and transportation property is eligible for 100 percent expensing if placed in service by the end of 2012. What’s more, there is no cap on the amount you can spend and deduct, and the benefit applies to businesses of any size.

Where Section 179 Fits:  Other benefits available only to small businesses fall under different provisions known as the Section 179 rules.   The maximum amount of property that small businesses could deduct immediately under Section 179 was scheduled to revert to its old limit of $25,000, but that’s now been raised to $500,000. This includes vehicles, machinery, furniture and other equipment.  A detailed list of qualifying types of property is available at IRS.gov.

To qualify for the Section 179 deduction, your property must have been acquired for use in your trade or business. Property you acquire only to produce income, such as investment property, rental property (if renting property is not your trade or business), and property that produces royalties, does not qualify.

When you use property for both business and non-business purposes, you can take the Section 179 deduction if you use the property more than 50 percent for business.  If you use it more than 50 percent for business, multiply the cost of the property by the percentage of business use. Use the resulting business cost to figure your Section 179 deduction.

When to Forego the Bonus: The IRS also ruled recently that you can forego bonus depreciation if you want to.  That’s something you might want to consider if your business has an expiring net operating loss, an expiring capital loss carryover, or you believe that much higher tax rates in the future will make deductions more valuable in later years.

The website Section179.org is a helpful resource for figuring out Section 179 deductions, and covers the details in plain language, including what property qualifies and the many ways that the deduction can impact your bottom line. The site also has IRS tax forms, and tools for you to use, including a free Section 179 deduction calculator.

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