Depreciation changes

guest commentary by David Potts

If there was a top ten list of questions that business owners ask their CPA as they begin to contemplate their income tax liability as the year end approaches, toward the top of the list would be the question, “Do I need to buy a new truck or car?” or “Do I need to buy a new piece of equipment?” Like any good accountant, I always give a definite answer —”It depends.”

If it is in your best interest to lower your taxable income (and sometimes it’s not), 2011 is a particularly good year to buy new equipment or new vehicles due to our government’s “generosity.” Normally when a business buys equipment or vehicles, the cost of these purchases are depreciated (pro-ratably deducted) over several years. But in order to “stimulate” our economy the current tax law allows liberal current year tax deductions to encourage business owners to buy new equipment and vehicles. One method to take advantage of these liberal deductions is to purchase equipment and vehicles that qualify for 100% Bonus Depreciation.

Bonus depreciation means that a portion of the purchase price can be expensed in the first year of purchase and any cost remaining is depreciated under normal depreciation rules. Currently, the bonus amount is 100%. This means if you buy or have bought qualified property and have placed it in service after Sept. 8, 2010, and before Jan. 1, 2012, you can depreciate or deduct the total cost in 2011 or your applicable tax year if different. If you wait until Jan. 1, 2012, or later to purchase equipment for your business, then the first year bonus depreciation would drop to 50% where only one-half the purchase price would be deducted in the year of purchase with the remaining cost depreciated over the equipment’s recovery period.

For example, if you operated a machine shop and bought a new lathe for $100,000 and placed it in service by Dec. 31, 2011, you could deduct the full cost, $100,000, in 2011. If you waited until 2012 to purchase the lathe, the current year deduction in 2012 would be $57,143 (50% of the cost, $50,000 plus normal depreciation for a 7 year recovery period of $7,143). At the end of 2012 bonus depreciation dies a silent death and the depreciation for the above lathe will only be $14,286. What a difference a couple of years will make.

Qualified property is primarily tangible personable property, computer software, water utility property, or qualified leasehold improvement property. The property must also be new, not used or pre-owned (with a few exceptions). Generally real estate is not qualified property although some special use structures might qualify.

“Placed in service” means that the purchased equipment is delivered and available for use, not just ordered or not just paid for and waiting delivery.

The great thing about the 100% bonus depreciation is there is no limit to the amount of equipment that can be purchased and written off and the deduction can be used to increase or create a loss for the year. This is in contrast with 2011’s Section 179 expensing rules that limit the deduction to $500,000 and an upper limit of $2,000,000 for equipment purchased before phasing out the allowable Section 179 deduction altogether.

When it comes to vehicles, there are many limitations and definitions that determine the deductibility of the purchase price. Rather than go into all the rules and regulations in this article just remember this. If you buy or have bought a NEW truck or SUV built on a truck chassis that has a load gross vehicle weight in excess of 6,000 pounds, and if the percentage business use is over 50%, you can deduct the total cost of the truck or SUV times the business use percentage under the 100% bonus depreciation rules. Need an excuse to buy a new Tahoe?

Keep in mind a short article such as this can’t cover all the exceptions and definitions contained in the Internal Revenue Code about bonus depreciation. Be smart and find professional help to insure that if you purchase equipment or a vehicle this year you get the intended results.

In my next article I will discuss the rules for expensing assets purchased under Section 179 and when it is to your advantage.

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]