Stimulative depreciation

guest commentary by David Potts

Way back in the Eighties, Congress enacted a tax provision to allow small businesses a generous depreciation deduction on qualifying property to encourage such businesses to buy machinery and equipment.

I’m sure it was to stimulate the economy.

According to the 1985 Master Tax Guide published by Commerce Clearing House, the deduction was limited to $5,000. This was the beginning of one of small businesses’ favorite write-offs, the Section 179 Deduction. Until this time equipment purchases normally had to be depreciated over a certain life span. The upfront deduction allowed by Section 179 lowered a business’ income tax making it more affordable to buy equipment.

Over the next couple of decades the deduction morphed to, by 2003, 100% of the equipment cost up to $25,000 as long as total equipment purchased was less than $200,000. Today, until Dec. 31, 2011, the Internal Revenue Code provides us with the most generous Section 179 Deduction in its history, a potential deduction of $500,000 unless the current year equipment purchases and qualified real property exceed $2,000,000.

After your equipment and leasehold purchases exceed $2,000,000, the $500,000 limit of the Section 179 Deduction decreases dollar for dollar until the deduction is no longer available. Based on current law, the Section 179 Deduction will decrease substantially in 2012 with a $125,000 limit on the deduction and a $500,000 phase out threshold.

If you can’t follow the previous paragraph, it’s OK. I’m not sure I could follow it if I hadn’t been a CPA for more than 30 years. Here’s what I said above, restated for clarity: What goes up must come down.

In a previous commentary, I discussed the 100% bonus depreciation where any equipment bought in 2011 could be expensed or written off rather than depreciated.

At first you would think this would make the Section 179 Deduction irrelevant. The important thing to remember is that in order for the equipment to qualify for 100% bonus depreciation, the asset purchased must be “original use.” Original use, except for a few exceptions, means the equipment purchased must be new equipment. Section 179 is for businesses that have or should have significant purchases of used equipment.

2011 is the year. It is the year to purchase large amounts of machinery and equipment or qualified real estate. Although I’m not a prophet, I expect 2011 will be the most generous year for bonus depreciation and the Section 179 deduction for years to come.

Take advantage of these generous tax provisions. After all, we have a budget deficit to close in the near future.

About Potts
David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts at ThePottsReport.com. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.

Also, feel free to e-mail topic suggestions or questions to [email protected]