By Ann Lakeman, Senior Accountant and Stanley Rose, Senior Manager, BNN Tax Division

With 2009 almost over, very little time remains to take advantage of some very favorable expiring deductions. Specifically, two provisions that allow accelerated write-offs of fixed asset acquisition costs will expire or revert to much less favorable levels after December 31, 2009. These benefits, known as “Section 179” deductions and “bonus depreciation,” are discussed in this article.

Section 179

Taxpayers engaged in an active trade or business, excluding trusts, estates, and rental entities, can elect to expense up to $250,000 of purchase costs for tangible personal property and software placed in service during the tax year. Some limitations apply: Section 179 is only allowed to the extent the entity produces taxable income. Also, if over $800,000 of qualifying property is placed in service during the year, the $250,000 deduction is reduced dollar-for-dollar by the excess over $800,000. Starting in 2010, the Section 179 deduction is reduced to $134,000 and for 2011 it is further reduced to $25,000. The $800,000 acquisition limits for 2010 and 2011 are $530,000 and $200,000, respectively.

Bonus depreciation

While somewhat less favorable than Section 179 deductions, taxpayers who do not meet the criteria to fully utilize Section 179 benefits may take advantage of bonus depreciation deductions. Eligible purchases include tangible personal property and software, and the rules allow 50% of such property costs to be deducted in the year placed in service. (Note that the remaining 50% may be depreciated using routine tax rules beginning with the year placed in service, so the true benefit in year #1 exceeds 50%.) Unlike Section 179, there is no cap on the amount of purchases, bonus depreciation may be used whether or not the entity reports taxable income and rental entities can utilize bonus depreciation. However, only new (not used) property qualifies. Bonus depreciation only applies to property placed in service through 12/31/09. It will not be available for 2010.

Most states, including Maine, do not allow use of bonus depreciation or the increased Section 179 deductions. Instead, the full cost of the property is deducted through routine tax depreciation over the life of the property or through similar methods that neutralize the federal deduction for state purposes.

For taxpayers who intend to acquire qualifying property in the near future, 2009 may be the year to do it. The property must be placed in service by 12/31/09 to qualify for these accelerated deductions. However, by doing so, taxpayers may significantly lower their 2009 taxable income by using provisions that will be limited or completely disallowed in future years.

This article presents only partial summaries of complex and detailed provisions. It is provided for informational purposes only and should not be relied upon for legal or financial advice. For more information regarding these rules, please contact Stan Rose at srose@bnncpa.com or Ann Lakeman at alakeman@bnncpa.com or call your BNN tax professional at 800.244.7444.

 

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