Manufacturers: Take Advantage of Bonus Depreciation Incentives Before They’re Gone
When the economy hit the skids in 2008, Congress significantly
expanded two first-year depreciation deductions as an incentive to businesses. 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.
“Capital equipment purchases should always be driven by the needs of the business versus the tax benefit. However, if needed, these first-year depreciation incentives have worked well for our clients,” says Marni Spence, manufacturing and distribution tax principal with LarsonAllen. “They came at a time of increased production for some manufacturing businesses and were helpful in sheltering the additional 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.
“It’s our view that any extension beyond 2012 is unlikely,” Spence 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 manufacturing and distribution-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 leasehold improvements (15 years) or machinery and equipment (7 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,” Spence 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, such as computer equipment, machinery, furniture and fixtures, qualified leasehold improvements, and vehicles.
First-year depreciation incentives: quick reference
The following chart summarizes 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%
|
A Fiscal year taxpayers apply the Section 179 limit for tax years beginning in 2011, 2012, or 2013.
B The 2012 (and estimated 2013) Section 179 limits are inflation indexed by reference to 2006.
C All taxpayers, regardless of whether reporting on a calendar or fiscal tax year, apply the bonus depreciation percent based on which calendar year the asset was acquired and placed in service.
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 timeframe than bonus depreciation.
Marni Spence, Manufacturing and Distribution Tax Principal
mspence@larsonallen.com or 407-802-1205
View our manufacturing and distribution principals.