By: Karen A. Goldberg, CPA, Tax Manager
In December 2010, the President signed into law the high profile tax bill that extended many tax benefits and tax rates that were scheduled to expire at the end of 2010. Two of the most important parts of this new law are the continuation of more generous bonus depreciation and a higher expense allowance through 2012.
The Federal Government realizes that without these incentive programs, business owners would have a difficult time making major purchases due to the state of the economy. With this law, purchases will pay for themselves (depreciate) within a reasonable timeframe (immediately), and your business can begin generating, much needed revenue by potentially increasing efficiencies with the new machinery.
If you are eyeing that new piece of equipment you know will improve your bottom line but can’t seem to bring yourself to go ahead and buy it, – think again. Consider that until the end of 2011, you can purchase a new piece of equipment and, as long as it is placed in service before January 1, 2012, it can be expensed immediately using 100% bonus depreciation of its value.
The reason to take advantage of this during the 2011 year is because starting in 2012 equipment purchases will revert back to 50% bonus. Property eligible for bonus must be original use property. Also, as the rule has been in the past, the equipment being expensed must be for original use only. Any prior usage, business or personal disqualifies the item(s).
In addition to bonus depreciation, the law also extended the Code Section 179 expense allowance through 2011. For 2010 and 2011, you may deduct up to $500,000 of the first $2 million in purchases of qualifying property immediately in the year in which you began to use it, rather than depreciating it over several years. Note that in the case of electing Section 179 expense, the equipment may be new or used. The maximum expense allowance is set to drop to $125,000 for 2012.
The next few months are a crucial time to begin year-end tax planning. Contact your financial advisor and ask how the extended rules for bonus depreciation and Section 179 expense for 2011 apply to your business plans for acquiring new machinery and equipment.
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