Year-end Tax Planning: making the most of quick write offs for capital goods purchases

August 21, 2012
Michael McDevitt

Michael McDevitt

Director

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Just about any owner of a “small” business that acquired a significant amount of assets in the last few years has noticed the IRS rules for writing them off have become very favorable.  In fact, in almost all cases for 2011, these rules allow a tax write off of either half or the entire purchase amount in the year the assets are acquired. 

Congress’ intent in loosening these rules a few years ago was to stimulate the economy and get people back to work.  The practical benefit to businesses is the corresponding reduction in the owner’s federal and state income taxes related to these business write offs can be as high as 40% of the cost of the asset!  Thus, many businesses like yours have been taking advantage of the current rules and significantly reducing the cost of the acquisition of needed business equipment.

Unfortunately, this generous write off benefit for businesses may soon be over.  Although bonus first-year depreciation and more-generous expensing limits have been extended by Congress before, another lease on life for these tax breaks is not certain this time around.  With the current election cycle in full swing it is unlikely Congress will agree to any extension of these tax breaks until the new Congress is seated early next year – if at all!  Unless Congress acts, these business tax breaks won’t be available or are severely limited next year.  

If your business plans include the possibility of purchasing machinery and equipment during the remainder of this year or early the next year, you should consider completing such purchases by year end. By doing so, you may be able to lock in these tax breaks by buying qualifying assets this year versus next year.

Like anything else in our tax laws, navigating these tax breaks effectively takes some planning and understanding of the rules.  For those that want to learn a little more about the 2011 rules, some details are provided below.  You are also invited to contact your BiggsKofford representative, or our Tax Director, Michael McDevitt, to discuss if you qualify for these tax breaks. 

Summary of Generous Asset Write Offs for 2012

Until the end of the year, current law allows two great ways for a business to write off some or all of the purchase amount of business assets acquired this year. 

Section 179 – 100% Write Off

Section 179 of the IRS Tax Code allows a business to deduct in the current year, the full purchase price of most business assets.  The assets may be either new or used.  That all sounds great, but there are a few limitations.  Four of the most important limitations are as follows:

  1. A business is cannot take more than $139,000 of Section 179 write offs for 2012.
  2. If a business acquires more than $560,000 of assets during 2012, the amount of Section 179 deduction it can claim is reduced.
  3. A business cannot use Section 179 deductions if it has a Net Operating Loss for 2012.
  4. Some types of assets don’t qualify (example – passenger cars).

Starting in 2013, the tax law will reduce the amount that can be written off under Section 179 to $25,000, versus the $139,000 limit for 2012!

Bonus Depreciation – 50% Write Off

During 2012, if a business asset doesn’t qualify under Section 179 rules, the bonus depreciation rules allow you to write off half of the purchase amount.  As with Section 179, there are several hurdles you must pass to qualify under the bonus depreciation rules:

  1. It is a “qualified asset.”  Most tangible property qualifies (no real estate or most intangible property).
  2. It is placed in service (bought) by the end of 2012.
  3. Its original use commences with the taxpayer (new asset, not used).

Starting in 2013, bonus depreciation will be gone, unless Congress acts to extend it.

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