12/15/2011
Some tax bills just defy spiffy acronyms. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Pub.L. 111-312, 124 Stat. 3296, H.R. 4853) is one of them. TRUIRJCA — nope, that does not roll off the tongue, like say EGTRRA (pronounced EggTra) and JGTRRA (JeggTra). If you think you’ve never heard of these…well, those are the original “Bush Tax Cuts.” In 2010, you may recall that Congress passed the unpronounceable Jobs Creation Act of 2010 to maintain the Bush Tax Cuts for another couple of years. “Bonus Depreciation” was one of the, well, bonuses of the Act to assist/encourage small businesses in the purchasing of *new* equipment.
On the surface, bonus depreciation (which lives in the IRC at Section 168(k) if you’d like to read about it in the original language…) is straight forward. But…there are some twists and turns, so please get some help if you plan to use this law to help you reduce tax by 12/31/2011. And here is the kicker – if you do NOT want to use this law for your 2011 purchases, you must elect OUT of it. As I say…get help.
Bonus Depreciation for 2011 allows you to deduct 100% of an asset’s cost if purchased after September 9, 2010 and placed in service (that is important) during 2011. If you purchased the asset back in 2010 and placed it in service in 2010, then you deducted it on your 2010 tax return with 50% bonus depreciation which was the law in 2010. But let’s say you bought computers on December 29, 2010 and they were not delivered and installed until January 10, 2011 – then, you were supposed to have waited and taken the bonus depreciation in 2011. Chances are good that you took the 50% deduction in 2010 (remember, the 100% deduction did not start until 2011) and wrote off the remainder with Section 179 election. Do not double dip on this one by accident. Your books will not balance and the IRS will take exception with your methodology. If you did this incorrectly – have a conversation with your tax preparer sooner than later.
A couple more rules to remember – the asset must be *new.* Used assets do not qualify for Bonus Depreciation (but there is always Section 179, which does allow the expensing of previously used assets). The asset must have a recovery period of twenty years or less (determined by the IRS) or water utility property or computer software other than software covered by Section 197 or be qualified leasehold improvement property as defined by Section 168(k)(3). Did I mention – get help. And while seeking help, remember – Congress was trying to make it less painful for you to buy stuff to stimulate the economy.
Why is Bonus Depreciation important? Because it is not limited – no ceiling as there is with Section 179. The sky is truly the limit. This is the year that there is no depreciation (OK, there is recapture…more in a moment). You could purchase a 6000 pound business SUV/truck with a price of $100,000 and no money down, and place it in service before the year end and get a $100,000 deduction on your business tax return for 2011. You could buy a $250,000 piece of equipment on a note, place it in service by the end of the year and get a $250,000 deduction before your first note payment is due in 2012. But do keep in mind that when you expense 100% of a newly purchased asset whether you pay cash or execute a note, the basis becomes ZERO. That means, if you sell the asset next year, the full sales price is taxable income (aka “recapture”). Also, payments made on a note or installment plan are not deductible (the portion of the payment that is interest is deductible). So – when you expense your purchase this year, you will not have an offsetting deduction next year when the asset is productive and helping you generate revenue.
That said, Bonus Depreciation is deductible even if it creates a net operating loss. You cannot do that with Section 179. You have to suspend the Section 179 loss to the next year. But the Bonus Depreciation is currently deductible, even if it takes company bottom line below zero. The net operating loss can be carried forward to offset next year’s bottom line income, or carried back to wipe out income and taxation from prior years (get help—this is a recurring theme). S corp shareholders – beware, net operating losses reduce your stock basis and can make distributions taxable (ok, one last time – get help).
These are just the highlights of Bonus Depreciation. How can such a simple concept be so complicated? Talk to us or your tax advisor for more details. Soon. Bonus Depreciation goes down to a mere 50% for 2012.