Bonus Depreciation vs. IRS Section 179
Under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, properties placed in service in 2012 are allowed 50 percent bonus depreciation. Leasehold improvements made to non-residential property are also eligible for bonus depreciation as long as the improvements are subject to a lease with non-related parties and the building is at least three years old. Qualified leasehold improvements to retail property are also eligible for bonus depreciation. The interiors must be open to the public and used in the retail trade. Qualified leasehold improvements to restaurant property are eligible for bonus depreciation if more than 50 percent of the building is used for the preparation and consumption of food.
An alternative to bonus depreciation is Internal Revenue Code Section 179, which allows expensing $125,000 to real property as of Jan. 1,2012 through Dec. 31, 2012. After Jan. 1, 2013, the amount will be reduced to $25,000. The assets purchased do not have to be new; however, there is a limit on the total assets purchased in each year. To reduce the amount of Section 179 expensing in 2012 and thereafter, the qualified asset purchase limit is $125,000 plus a cost-of-living adjustment. The amount of Section 179 expensed is also limited to taxable income. Section 179 expensing cannot create a loss.
Qualified assets are depreciable, tangible personal property purchased for use in the active conduct of a trade or business; off-the-shelf computer software; qualified leasehold improvements; qualified retail property; or qualified restaurant property. If there is an early disposal of the asset expensed under Section 179, the deduction must be recaptured; there is no recapture of bonus depreciation. Bonus depreciation is not adjusted for the Alternative Minimum Tax; and the bonus depreciation election must be made for all property in the same class. Certain states allow only $25,000 for Section 179 deductions and no bonus depreciation.