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Depreciation Deductions: What Are the Rules for 2012?

It seems like every year there are a new set of rules relating to what businesses can deduct on their tax return for fixed asset purchases.  In the past few years, contractors may have made decisions to purchase equipment before year-end in order to take advantage of accelerated write-off rules and reduce taxable income.  So the question that we frequently get this time of year is “If I buy equipment, will it reduce my tax bill?”

Bonus Depreciation:
Let’s start with Federal taxes.  Since 2008, bonus depreciation has existed in some fashion.  Bonus depreciation is a form of accelerated depreciation that allows businesses to deduct a certain percentage of eligible asset purchases in the year that the asset was placed in service.  Qualified assets consist of new (not used) property with a depreciation period of not more than 20 years, most computer software and certain leasehold improvements.  For a contractor, the fixed assets that would qualify include all heavy equipment.  Bonus depreciation of 50% of the cost of an eligible asset was allowed in 2008, 2009 and for much of 2010.  Beginning with assets placed in-service on September 9, 2010, bonus depreciation was increased to 100% of the cost of eligible assets.  The 100% depreciation rules were in effect through December 31, 2011.

For eligible assets placed into service in 2012, bonus depreciation is still available at 50% of the cost.  The remaining 50% would be depreciated over the tax life of the asset.  Therefore, for a 5 year asset, you can get a tax write-off of 60% of the acquisition price in the year that the asset is placed in service.  Bonus depreciation is currently scheduled to expire at the end of 2012 (no bonus depreciation allowed in 2013).

For state tax purposes, New Jersey and New York do not follow the IRS guidelines for bonus depreciation.  Therefore, the state tax implications should be taken into account during any tax planning or decision making regarding the timing of property acquisitions.

Section 179 expensing:
Section 179 of the Code permits expensing of a certain dollar amount of fixed assets in the year of acquisition.  Qualified section 179 property includes new or used machinery, equipment and other tangible personal property.  The dollar limit of section 179 property that can be expensed has been reduced significantly from 2011 to 2012.  For tax years beginning in 2012, the section 179 limit is $139,000.  However, if the business purchases more than $560,000 of total property purchases, the amount allowable is reduced dollar for dollar.  For tax years beginning in 2013 or later, the dollar limit is scheduled to be reduced to only $25,000 of qualified section 179 property, with a business purchase limitation of $200,000.  Lastly, a business is not allowed to generate a tax loss with section 179 deductions.  Therefore, the section 179 deduction is further limited to the amount of taxable income that the business has before the deduction.

Once again, the state treatment of section 179 property does not always mirror the Federal treatment and should be taken into account.  New Jersey allows $25,000 of section 179 expensing annually.

In summary, both bonus deprecation and section 179 expensing continue to be available during 2012 although at reduced levels when compared with what was available during 2011.  This article is a broad overview of the rules that are in effect in 2012 and we would be happy to discuss with you how these rules relate to your specific situation.

For more information, please contact Mike Testani at 732.283.9300.

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