Five Important Tax Changes Beneficial to Your Shop
On December 17, 2010 President Obama signed The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) that includes important depreciation and IRC Sec. 179 deduction changes, which were retroactive to September 9, 2010 and will benefit both large and small manufacturers.
1. Bonus Depreciation and Manufacturing: The new law allows 100 percent first-year bonus depreciation for qualifying new assets such as manufacturing equipment and machinery, furniture, computers, most purchased software, land improvements, large trucks (100% business use & over 6000 lbs), and qualified leasehold improvements acquired and placed in service between September 9, 2010 and December 31, 2011. The placed-in-service deadline is extended to December 31, 2012 for certain assets that have longer production periods, including transportation equipment and aircraft. Simply put, the taxpayer can expense 100 percent of the purchase price of new personal property acquired between September 9, 2010 and December 31, 2011.
2. Assets Acquired in 2012: The new law allows 50 percent first-year bonus depreciation for eligible assets placed in service during the 2012 calendar year. Additionally, the placed-in-service deadline is extended to December 31, 2013 for certain assets that have longer production periods. For example, if you purchased a over-the-road delivery truck (3 yr property) or purchased new manufacturing equipment (7 yr property) for $40,000, the depreciation deduction would be bonus depreciation of $20,000, plus the first year depreciation of $6,667 or $2,858, respectively.
3. No Difference for Alternative Minimum Tax: The 100 percent and 50 percent first-year bonus depreciation rules apply for both regular tax and alternative minimum tax (AMT) purposes; therefore, assets subject to the bonus depreciation rules have exactly the same depreciation deductions for both regular tax and AMT purposes.
4. Bonus Depreciation is Discretionary: If a taxpayer determines that 100 percent bonus depreciation is not beneficial, it is possible to elect to take 50 percent bonus depreciation or to not take any bonus depreciation. This election is made by asset class, so it is not an all or nothing proposition. In other words, if you don’t need the tax deduction this year, you can elect out of bonus depreciation and postpone greater deductions into future years. Additionally, the 2010 Tax Relief Act extends the provision that allows C corporations to forgo bonus depreciation deductions and instead "free up" otherwise unusable research tax credit and minimum tax credit carryovers for qualified assets placed in service by December 31, 2012 (December 31, 2013 for certain longer-lived assets).
5. Expensing the Cost of Purchased Equipment: In 2003, Congress significantly increased the IRC Sec. 179 deduction by $76,000 to $100,000 to induce businesses to invest in equipment. For the tax years beginning in 2010 and 2011, the Small Business Jobs Act dramatically increased the maximum deduction to $500,000 with a phase-out threshold of $2 million. For assets placed in service in tax years beginning in 2012, the maximum Section 179 deduction is $125,000 (adjusted for inflation) with a phase out threshold of $500,000. As a planning note, if Congress does not extend the provision again, the Sec. 179 limits will revert to $25,000 and $200,000 respectively beginning in the 2013 tax year. Eligible assets are similar to qualified bonus depreciation with the exception of land improvements. However, manufacturers may have a number of assets that the IRS considers other tangible property that will qualify for the Sec. 179 deduction such as: various manufacturing machinery and equipment, purchased software and computer equipment. In contrast to qualified bonus depreciation property, Sec. 179 property can be either new or used. Sec. 179 expensing can be combined with bonus depreciation for an even greater tax benefit. However, the deduction created by Sec. 179 expensing cannot create a net operating loss for the taxpayer, while there is no such limitation on bonus depreciation deductions. In most cases the Sec. 179 deduction can be a tool to reduce state income taxes, whereas bonus depreciation is disallowed by most state taxing authorities.
Cheddy Wigginton is a CPA and Tax Member of Frost, PLLC. He has over 13 years of experience in the agricultural and manufacturing industries and primarily works with privately owned businesses and their owners in implementing various tax saving strategies.
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