By Mark Buescher, C.P.A.
It is not unusual to have business clients come into our office and ask, “what is the best way we can reduce our income tax bill?” Generally, the next question is “should I purchase equipment before year end to take advantage of any available business deductions?”
My normal response is usually the same. My recommendation to the client is to consider the economic need before the consideration of tax savings. In other words, if the equipment is needed by the business and can enhance business revenue, then I would certainly take advantage of any beneficial tax law provisions. Obviously, if the economic need is evident, a business could then consider accelerating or delaying equipment purchases, depending upon the circumstances.
However, this year my response is somewhat different and definitely has a much more aggressive tone. As businesses in the Madison and North Florida area continue to navigate through these tough economic times, every effort should be made to take advantage of a special tax provision set to expire soon. Under the Tax Relief Act of 2010, businesses may be able to write off the entire cost of business property placed in service this year, thanks to 100% “bonus depreciation.”
Prior to this law, a business was able to claim 50% bonus depreciation on qualified new (but not used) property placed in service in 2010. This included property with a cost recovery period of 20 years or less, most computer software, qualified leasehold improvement property, and certain water utility property. Bonus depreciation could be coordinated with Section 179 first-year expensing and regular depreciation deductions (subject to the annual limits).
However, the Tax Relief Act, signed December 17, 2010, improves and extends the tax benefits. It allows a business to claim 100% bonus depreciation for qualified property placed in service from September 9, 2010, through December 31, 2011. Beginning in 2012, the rules revert back to the 50% bonus depreciation provisions. Obviously, timing is crucial for this year’s equipment purchases.
The IRS also recently issued new guidance on using bonus depreciation. It focuses on the following areas:
Depreciation step-down. You’re allowed to “step-down” from 100% bonus depreciation to 50% bonus depreciation this year if it suits your needs. For example, it may not be advantageous for a business to front-load its depreciation deductions to receive the maximum amount. The IRS guidance spells out the procedure for cutting back to 50% bonus depreciation.
Company vehicles. The first-year depreciation deduction for “luxury cars” and other vehicles is enhanced by $8,000 due to the bonus depreciation rules. Be aware that certain heavy-duty SUVs and other vehicles weighing more than 6,000 pounds are exempt from the luxury car limits. If purchased after September 8, 2010, and before January 1, 2012, they may qualify for 100% bonus depreciation.
Qualified leasehold property. The IRS says that qualified restaurant and retail improvement properties may be eligible for 100% bonus depreciation under the definition of “qualified leasehold property.”
Component depreciation. A business may be able to deduct certain components of a business building over a faster cost recovery period than the usual 39-year period required for an entire building. The IRS ruling authorizes an election to use 100% bonus depreciation for qualified components of a self-constructed building.
However, even with the recent IRS guidance, the depreciation rules remain very complicated. In taking advantage of these soon to expire special tax provisions, I would definitely contact your tax advisor to help you navigate through the do’s and don’ts.
Mark Buescher, CPA is owner and principal of Buescher and Ruff, LLC, a local full service accounting firm in Madison, specializing in tax preparation, business consulting and tax planning. Tax laws contain varying effective dates and numerous limitations and exemptions that cannot be summarized easily. For details and guidance for your specific situation, contact your tax advisor.