Sun Setting on Bonus Depreciation Incentives
When the economy hit the skids in 2008, Congress significantly
expanded two first-year depreciation deductions as an incentive to the business community. The goal was to induce spending on capital equipment and some categories of real estate improvements by allowing considerably improved first-year deductions. But there’s not much time left to take advantage—these perks start shrinking in 2012, and it doesn’t appear they’ll be renewed.
“These first-year depreciation incentives have worked well for our ag producers,” says Cheryl Meyer, agribusiness tax principal with LarsonAllen. “They came at a time of improved commodity prices in many farm sectors and were helpful in sheltering increased income. But as these incentives wind down, what’s left will look small by comparison.”
Bonus depreciation deduction
From 2008 through most of 2010, the bonus depreciation deduction was 50 percent of the cost of new assets. But for assets acquired and placed in service from September 9, 2010, through December 31, 2011, it increases to 100 percent. Congress has also extended the deduction into 2012, but at the lower 50 percent rate.
“Currently, the tax law does not extend bonus depreciation past December 31, 2012, and our view is that any extension is unlikely,” Meyer says.
To qualify, the asset must have its original use commence with the taxpayer (i.e., new rather than used property) and have a depreciable life of 20 years or less. Virtually all farm-use assets have a depreciable recovery period of 20 years or less, and accordingly are eligible. Bonus depreciation is most effective when applied to assets with a longer recovery period, such as machine sheds and shops (20 years), or drainage tile and culverts (15 years).
Section 179 deduction
For most of the past decade, the Section 179 deduction was maximized at just over $100,000. When the recession hit, Congress bumped the limit to $250,000 but later increased the amount to $500,000 for tax years beginning in 2010 and 2011. More recently, Congress indicated that for the tax year beginning in 2012, the Section 179 deduction would drop back to a $125,000 annual maximum (although inflation indexing is applied, and the actual number should be $130,000–$135,000).
“This seems to signal Congressional intent for the Section 179 limit as we come out of the recession,” Meyer says.
Not only will the Section 179 deduction shrink beginning in 2012, but fewer small businesses will have access to this write-off. During 2011, the deduction phases out only if a taxpayer’s eligible purchases exceed $2 million. But starting in 2012, the phase-out threshold is $500,000.
The deduction is valid for both new and used asset additions. It applies to machinery, equipment, and special use or single purpose agribusiness buildings, such as bins, drying systems, and livestock barns. But it is not available for general purpose ag buildings, such as machine sheds and shops, nor is it often available to landlords who purchase or construct properties used by a tenant.
First-year depreciation incentives: quick reference
The following chart is a summary of the first-year depreciation incentives that are in the law through 2012, as well as the amounts that we expect to be applicable for 2013 and after.
Calendar Year
|
Section 179 LimitA
|
Bonus Depreciation (New Assets Only)C
|
2011
|
$500,000
|
100%
|
2012
|
$125,000B
|
50%
|
2013 (estimated)
|
$125,000B
|
0%
|
How we can help
The eligibility rules for the Section 179 deduction and the bonus depreciation are confusing at best. If you plan to take advantage of the larger first-year deductions by making significant capital expenditures either in 2011 or 2012, consider having your tax advisor compute your actual depreciation deduction—especially if you operate on a fiscal tax year, where the Section 179 limits apply to a different time frame than bonus depreciation.
Cheryl Meyer, Agribusiness Tax Principal
cmeyer@larsonallen.com or 507-233-5207
View our agribusiness principals.