The Depreciation Bonus is in Limbo as Sec. 179 Expensing Levels are Extended for 2010
Depreciation Bonus At A Glance
- Sec. 1201 of the 2009 American Recovery and Reinvestment Act (ARRA) allowed additional first-year depreciation of 50 percent of purchase cost by extending for one year the depreciation bonus created by the 2008 Economic Stimulus Act
- Depreciation bonus helped businesses that bought equipment last year cut their 2009 tax bill
- Applied, among other things, to purchases of tangible personal property (including construction, mining, forestry, and agricultural equipment) with a MACRS recovery period of 20 years or less
- Equipment must have been purchased and placed in service in 2009
- Applied to new equipment only
- Allowed for both regular and alternative minimum tax purposes
- Discretionary - Taxpayer need not claim the depreciation bonus
- Depreciation bonus expired at the end of 2009, but AED and its allies are working with Congress and the administration to reinstate this important provision for 2010.
Sec. 179 Expensing At A Glance
- Sec. 1202 of the ARRA extended for one year the increased Sec. 179 expensing limit of $250,000 and phase-out cap to $800,000
- Companies could expense up to $250,000 in purchases as long as they don't spend more than $800,000
- Expensing was phased-out for each dollar that purchases exceed $800,000
- Companies with total purchases of $1,050,000 couldn’t use Sec. 179
- New and used equipment was eligible for expensing
- Could be combined with depreciation bonus
- Sec. 179 expensing levels were extended through 2010 by the recently enacted HIRE Act (without ARRA and the HIRE Act, the expensing amount would be around $130,000 and the phase-out level would be around $500,000)
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In Feb. 2009, two significant incentives to encourage equipment purchasing were included in the American Recovery and Reinvestment Act (ARRA).
First, the ARRA extended through the end of 2009 the 50 percent bonus depreciation first created in February 2008. Companies that bought equipment in 2009 were able to depreciate an additional 50 percent of the cost of assets placed in service last year. Only new equipment was eligible.
For both the regular tax and the alternative minimum tax, the first-year depreciation deduction otherwise allowed on certain qualified tangible personal property acquired and placed in service during 2009 was increased by 50 percent of the cost of such property.
The ARRA also extended for one year the significantly increased Section 179 small business expensing levels. Without the economic stimulus law, the Section 179 small business expensing limit for last year would have been around $130,000 with a phase-out threshold of roughly $500,000. However, under the ARRA, for 2009 the expensing limit was up $250,000 and the phase-out threshold to $800,000. Thus, in 2009, a small business could expense up to $250,000 as long as its qualified equipment purchases did not exceed $800,000. For each dollar that total equipment purchases exceeded $800,000, the amount that could be expensed decreases by one dollar, so that a company that made $1,050,000 in total purchases will not be able to expense anything (but could still claim the depreciation bonus).
For purposes of the Section 179, qualifying property is generally depreciable tangible personal property that is purchased for use in the active conduct of a trade or business. Unlike the depreciation bonus, both new and used equipment is eligible for Sec. 179 expensing.
Fortunately, on March 18, President Obama signed into law the Hiring Incentives to Restore Employment (HIRE) Act. The HIRE Act restores the $250,000 Sec. 179 expensing level for an additional year, through the end of 2010.
AED and our allies are still working with Congress and the administration to reinstate the bonus depreciation through 2010. To send a letter to lawmakers urging Congress to reinstate the depreciation bonus for 2010 click here: http://capwiz.com/aedaction/issues/alert/?alertid=14424391
The deductions provided by the asset expense election and bonus depreciation are illustrated by the following example using the 2009 tax year:
Corporation X purchases and places in service machinery (5-year property) in its calendar 2009 tax year having a cost of $650,000, which will be subject to the half-year convention. Corporation X will elect to expense $250,000 under Sec. 179, leaving the machinery with a remaining depreciable basis of $400,000. Applying the bonus depreciation provided by the Act, Corporation X is entitled to a further deduction in 2009 of $200,000 (50% of $400,000), leaving the machinery with a remaining depreciable basis of $200,000. Standard first-year depreciation for 5-year property under the half-year convention is 20%, providing Corporation X with further depreciation on the machinery of $40,000. Accordingly, Corporation X is entitled to a total expense and depreciation deduction of $490,000 in 2009 on its $650,000 machinery. The remaining $160,000 cost of the property is recovered after 2009 under otherwise applicable rules for computing depreciation.
By increasing a company's tax deductions in the current year, the asset expense election and bonus depreciation helps to trim tax bills in the short term. However, because there will be less to depreciate in the future, the company's tax bill in later years may be higher.
Keep checking our DepreciationBonus.org Web site for more information.
For more information about the depreciation bonus, contact:
Christian A. Klein
Vice President of Government Affairs & Washington Counsel
Associated Equipment Distributors
121 North Henry Street
Alexandria, VA 22314
Tel. 703.739.9513
Fax 703.739.9488
To send an e-mail to Christian Klein, click here.
Please note that the information on this site is provided by the Associated Equipment Distributors as a public service to equipment purchasers. It should not be construed as tax advice or as a promise of potential tax savings or reduced tax liability.
For more information about the depreciation bonus, contact your tax professional or visit the Internal Revenue Service website.
Associated Equipment Distributors, Inc. | 615 W. 22nd Street, Oak Brook, IL 60523
PHONE: 630-574-0650 | TOLL FREE: 800-388-0650 | FAX: 630-574-0132 | e-mail
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