Depreciation Changes in the Tax Hike Prevention Act

HBS Tax-Based Bookkeeping Services

The Tax Hike Prevention Act passed in late December of 2010 extended many “Bush era” tax rates that were set to expire in 2010 and reinstated some tax deductions and credits that had expired in 2009.  Today, I’ll review two changes included in the Tax Hike Prevention Act that will allow your business to write off property purchased in 2010 and 2011.  Use these changes to reduce your tax bill for 2010 and strategize to save taxes in 2011.

Bonus Depreciation Increased to a Full 100%: A major change in the Tax Hike Prevention Act allows businesses to deduct the full cost of certain property placed in service from September 8, 2010 to December 31, 2011.  For property placed in service between January 1 and September 7, 2010, Bonus Depreciation is 50% of its total cost.

Property that qualifies for bonus depreciation includes “original use” (meaning “new”) property having a depreciable recovery period of 20 years or less.  This includes most property and equipment used in business – although vehicles may be subject to special limits.  Computer software and qualified leasehold improvements are also eligible.  Qualified leasehold improvements are improvements made (pursuant to a lease for the exclusive use of the lessee) to the interior of a nonresidential building that has been in service for at least three years.

Bonus Depreciation is mandatory unless your business elects out. To elect out you must forego Bonus Depreciation for all property with the same depreciable life placed in service that tax year (for example: all property with a 7 year life placed in service in 2010).  Bonus Depreciation is not limited by business size and the potential write off is not capped at a specific amount.

Section 179 Expense Limit Extended:  Section 179 of the US Tax Code allows businesses to expense certain property rather than depreciate it over a number of years.  The tax rules for 2010 allowed businesses to utilize the “179 election” to expense up to $500,000 of property placed in service during the year.  The Tax Hike Reduction Act extends this $500,000 limit through 2011.

Property that qualifies for the 179 Expense includes most “non-rental” personal property used at least 50% in a trade or business.

The full $500,000 deduction is available to businesses that place less than $2,000,000 of qualifying property in service during each tax year.  The allowable deduction is reduced dollar for dollar if the total value of qualifying property placed in service exceeds $2,000,000 during the year.

Although Bonus Depreciation and the Section 179 Expense can be used to reduce a business’s taxable income for a given year, some forethought should be exercised before claiming either.  Corporations and the owners of sole proprietors, partnerships, and S corporations will want to consider future projected income levels.  If income is expected to rise in the future, greater over-all tax savings may be achieved by opting out of bonus depreciation and not claiming the 179 Expense and saving the depreciation deduction for years when income is taxed at higher marginal rates.

Business owners should also make sure they plan to keep any property they expense or rapidly depreciate. “Recapture” may be required when this property is later sold or ceases to be used by the business.  “Recapture” means that a deduction taken in one year becomes income in another when certain events occur.  Depreciation recapture takes several forms and can happen when business use of property falls below 50% or when a depreciated asset is sold.  In either event the previous 179 expense or a portion of gain attributable to depreciation may need to be “recaptured” as self-employment or ordinary income depending on the circumstances.  Recapture rules can be complicated and special rules apply to real property and installment sales.  Make sure you talk to a tax professional if you have any questions.

The careful utilization of recent changes to Bonus Depreciation and the Section 179 Expense can provide a valuable, tax-saving opportunity for your business.  If you have any questions regarding your personal or business taxes or need assistance preparing your taxes or planning for the future, please contact our office to speak with a tax professional.

Brett Hersh's avatar
  • Author: Brett Hersh
  • Bio: Brett Hersh, EA, MBA, is the owner of HBS TAX & Small Business Experts. He is an Enrolled Agent (EA) with the IRS and licensed by the US Treasury Department to prepare all tax returns and represent taxpayers before the IRS for audits, collections and appeals. He is also Dave Ramsey’s ELP for Tax and Accounting, a continuing education instructor for tax professionals through Lorman Education, and a local speaker/presenter on the topics of tax and business growth. He can be reached at (304) 267-2594.