As we begin to approach the end of the year, business owners are asking whether they should purchase equipment in 2010 or 2011. One of the factors that plays into this decision is the tax incentives offered by the federal government regarding depreciation deductions. However, not only do business owners need to be aware of what the law is now for 2010 and 2011, they also need to be aware of legislative proposals. At this time, legislation has been introduced into the Senate which would be retroactively effective back to January 1, 2010 and President Obama has proposed tax incentives that would be retroactively effective back to September 8, 2010.
The bonus depreciation deduction first became available with the passing of the Job Creation and Worker Assistance Act of 2002 as a way of incentivizing businesses to purchase equipment and thus stimulate the economy. This deduction is just like its name implies - it is bonus depreciation offered in addition to the maximum allowable Section 179 deprecation.
While businesses could initially claim 30% of a qualifying asset's tax basis as bonus depreciation during the first year that the qualifying asset was placed into service, this amount was increased to 50% in 2003 and remained at this percentage through the end of 2009. The bonus depreciation deduction partially expired on December 31, 2009. As of January 1, 2010, only certain property having longer production periods, such as corporate aircraft, may be depreciated using bonus depreciation; however, the property must be put into service prior to January 1, 2011.
In an effect to stimulate the economy, President Obama has proposed that the bonus depreciation deduction be increased to 100% of a qualifying asset's tax basis. This deduction would be available for qualifying property placed into service during the time period from September 8, 2010 until December 31, 2011.
In addition, the Bonus Depreciation Extension to Create Jobs Act was introduced to the Senate in mid-June. Enactment of this legislation would allow businesses to immediately write-off 50% of the cost of new depreciable property placed into service in 2010; or prior to January 1, 2012, for property having longer production periods (including corporate aircraft).
Section 179 Depreciation
The Section 179 depreciation deduction generally enables small businesses to deduct a portion of the cost of qualifying property placed into service during a tax year. There are several limitations imposed on this deduction.
First, there is a limit on the amount that may be claimed as a deduction. For 2010, the maximum deduction is $250,000. For 2011, the maximum deduction will be $25,000 under current law.
There is also a phase out provision, which requires taxpayers who place more than $500,000 worth of qualifying property into service during 2010 to reduce, dollar for dollar, this deduction by the amount exceeding the $500,000 threshold. For 2011, this threshold amount will be $200,000 under current law.
In addition, a taxpayer's Section 179 deduction for any taxable year may not exceed the taxpayer's aggregate income from the active conduct of trade or business by the taxpayer for that year. For example, if the taxpayer's net trade or business income from active conduct of trade or business was $100,000 in 2010, then the taxpayer's Section 179 deduction cannot exceed $100,000.
Under the Small Business Job Creation Act of 2010, which was introduced into the Senate back in March, the maximum Section 179 deduction for 2010 through the end of 2014 would remain at $250,000. However, the phase out amount would increase to $800,000 for that time period.