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Significant Tax Savings for Fixed-Asset Investments in 2011

Late in 2010, Congress extended two key tax-depreciation provisions — Section 179 and Bonus Depreciation. These provisions should be kept in mind with your capital-expenditure planning for this year and future years as they could save you significant tax dollars now.

Section 179 allows a taxpayer to expense new or used personal property purchased during the year for tax purposes. To be eligible, property must meet the following requirements:

• $500,000 maximum expensing
• Total amount of fixed-asset acquisitions limited to $2,000,000 of qualified property. If total qualified property acquired during the year exceeds $2,000,000, the maximum Sec. 179 expense amount is reduced dollar for dollar.
• Property can be new or used
• Sec. 179 deduction is limited to business income of the taxpayer
• Real property such as land, buildings, and permanent structures do not qualify unless the real property qualifies as qualified leasehold improvement, qualified restaurant property, or qualified retail-improvement property. The Sec. 179 expensing limit on qualified real property is $250,000.
• For 2011, bonus depreciation allows a taxpayer to deduct the full cost of new property placed in service. Bonus depreciation can be used to create a net operating loss, unlike Sec. 179 expensing. To be eligible, property must meet the following requirements:
• Placed into service after September 8, 2010 and before January 1, 2012
• Original use of the property must begin with the taxpayer (property must be new and not used)
• Property must have a tax-depreciation life of 20 years or less under MACRS
• Non-custom-made computer software
• Certain qualified leasehold improvements for nonresidential buildings

These tax-depreciation elections can create large deductions on your 2011 return so you should keep the following in mind:

• Your taxable income in future years will be larger due to the lack of depreciation on assets with Sec. 179 or bonus depreciation in 2011.
• For a pass-through entity (S-Corporation, Partnership, or LLC), will the owners be able to use these deductions? The maximum $500,000 Sec. 179 limit is computed at the owner level. If the taxpayer has multiple pass-through entities, depreciation deductions should be coordinated.
• With increasing individual income tax rates, does it make sense to take additional deductions now under a lower tax rate?
• A taxpayer can pick and choose which assets to take Sec. 179 expense on. Also, a taxpayer can elect to not take bonus depreciation on an asset-class by asset-class basis. The elections to take these tax-depreciation options are irrevocable.
• What will the state tax impact be of taking Sec. 179 and/or bonus depreciation? Many states do not allow bonus depreciation and have lower Sec. 179 expense limits. 
• After 2011, bonus depreciation is legislated to expire. Also, the maximum Sec. 179 expense in 2012 is $125,000 with a phase-out beginning when total qualified property purchased exceeds $500,000. Depreciation can be a powerful tax-planning tool for your business and help with cash flow.

For a more detailed discussion of these tax-depreciation options or any tax matter please contact Cara Hoffman at choffman@BlackmanKallick.com or 312-980-3274, Michael Calahan at mcalahan@BlackmanKallick.com or 312-980-2996, or your Blackman Kallick representative. Thanks to Gina Mastrangeli for her help in writing this article.

 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.