by Richard Beutelschies, CPA, Tax Partner, TR Moore & Company, A Doeren Mayhew Firm
Careful planning during the year can help you maximize depreciation deductions in the year of purchase, and it’s especially important to consider purchases that could be made before year-end.
For business assets with a useful life of more than one year, you generally must depreciate the cost over a period of years. In most cases, the Modified Accelerated Cost Recovery System (MACRS) will be preferable to the straightline method because you’ll get a larger deduction in the early years of an asset’s life. But if you make more than 40 percent of the year’s asset purchases in the last quarter, you could be subject to the typically less favorable mid-quarter convention.
Consider these depreciation-related breaks, and download our 2011-2012 Tax Planning Guide for more savings strategies:
100 percent bonus depreciation. The 2010 Tax Relief Act significantly enhances bonus depreciation by temporarily increasing this additional first-year depreciation allowance to 100 percent and providing a 50 percent allowance for 2012. Qualified assets include new tangible property with a recovery period of 20 years or less (such as office furniture, equipment and company-owned vehicles), off-the-shelf computer software, water utility property and qualified leasehold-improvement property.
The act also extends the provision allowing corporations to accelerate certain credits in lieu of claiming bonus depreciation for qualified assets acquired and placed in service through Dec. 31, 2012 (Dec. 31, 2013, for certain long-lived and transportation property).
Bonus depreciation will benefit more taxpayers than Section 179 expensing (see next bullet), because it isn’t subject to any asset purchase limits. However, unlike Sec. 179 expensing, bonus depreciation isn’t available for used property. If you’re anticipating major purchases of assets in the next year or two that would qualify, you may want to time them so you can benefit from 100 percent bonus depreciation.
Section 179 expensing election. Business owners can use this election to deduct (rather than depreciate over a number of years) the cost of purchasing such assets as equipment, furniture and off-the-shelf computer software. For 2011, the expensing limit is $500,000, and up to $250,000 of that amount can be for qualified leasehold-improvement, restaurant and retail-improvement property. (Heating and air conditioning units aren’t eligible for the $250,000 amount.)
The break begins to phase out dollar for dollar when total asset acquisitions for the tax year exceed $2 million. You can claim the election only to offset net income, not to reduce it below zero.Sec. 179 may be less important while 100 percent bonus depreciation is available. Depending on the type of asset, 100 percent bonus depreciation may provide the same tax savings — without any net income requirement or limit on asset purchases. But only Sec. 179 expensing can be applied to used assets, and you’ll also want to consider state tax consequences.
Accelerated depreciation. This allows a shortened recovery period of 15 years — rather than 39 years — for qualified leasehold-improvement, restaurant and retail-improvement property, but, as of this writing, only through 2011. If you’re considering making such investments, you may want to do so this year to ensure you can take advantage of this break. But you’ll also need to consider how this fits in with bonus depreciation and Sec. 179 expensing opportunities, which will provide a greater benefit if the property is eligible.
Cost segregation study. If you’ve recently purchased or built a building or are remodeling existing space, consider a cost segregation study. It identifies property components and related costs that can be depreciated much faster, dramatically increasing your current deductions. Typical assets that qualify include decorative fixtures, security equipment, parking lots, landscaping and architectural fees allocated to qualifying property.
The benefit of a cost segregation study may be limited in certain circumstances —for example, if the business is subject to the AMT or is located in a state that doesn’t follow federal depreciation rules.
Download our 2011-2012 Tax Planning Guide for more savings strategies.
As Tax Partner, Richard Beutelschies leverages more than 30 years experience to lead tax services at the Houston location of top 100 U.S. firm Doeren Mayhew, assisting business owners in areas such as compliance, tax savings planning, estate planning and corporate tax structuring. For more information, contact us.
