You know the old adage: “The only certainties in life are death and taxes.” Although the many unresolved tax issues during 2010 may have made this seem questionable, Congress finally passed the Tax Relief Act of 2010. This legislation offers numerous advantages for both businesses and individuals. Some are extensions of existing legislation you may already be employing in your tax strategies, while others offer new tax opportunities.
The 2010 tax bill includes multiple beneficial provisions for businesses, including:
- 100 percent Bonus Depreciation
- Section 179 Asset Expensing Election
- Loss Carry Backs & Carry Forwards
- Leasehold Improvements Deduction
- Research & Development (R&D) Tax Credit
- Domestic Production Activities Deduction (DPAD)
- School Contributions: Used Computers
- Energy Tax Credit
Bonus depreciation is the big winner for businesses in the new tax legislation. This provision allows for immediate write off of new (not used) equipment. To qualify, the new equipment must be purchased from September 9, 2010 through December 31, 2011 and placed into service during this specified time frame. It should be noted that “bonus” depreciation is really a misnomer for this benefit, as it is actually an acceleration of the actual depreciation into the first year or early years, and not a “bonus.” As such, it means there will be no write off for your business in future years.
Section 179 Asset Expensing Election
Great as it is, the bonus depreciation provision only applies to new equipment. For other asset purchases, there is the Section 179 Election. This is an accelerated depreciation that can be used by small businesses for both new and used assets, allowing you to expense up to $500,000 of assets purchased in 2010 and 2011. For example, if you purchased an asset for $450,000, the whole asset could be expensed. If you purchased equipment for $1 million, the maximum amount of $500,000 would apply. Of course, there is always a limitation, e.g.: if you exceed $2 million a year in total assets purchased, the $500,000 maximum deduction is lowered dollar-for-dollar to $0 at $2.5 million in total annual purchases. Beginning in 2012, the expensing option reverts back to $125,000.
The printing industry has always had an issue with limitations on the 179 because of the high cost of printing presses. Therefore, bonus depreciation is now the better deal for new assets, since there is no limitation.
An additional perk of the 179 election may apply in acquisition situations. There is a tremendous amount of consolidation in the industry now, and sometimes specific assets (furniture, software, equipment, etc.) are being acquired as well as the customer list. When acquiring another company as an asset purchase (where you buy the assets versus a stock purchase), that list of equipment you are purchasing is just like buying any used equipment. It is considered used, so it does come under the 179 expensing option with its $500,000 expensing benefit. Keep in mind, though, that if your equipment or furniture purchases in an annual period exceed the $2 million limit, you can’t utilize the expensing option for used equipment.
Loss Carry Back/Carry Forward
As a result of accelerating the depreciation write-offs of equipment purchases, carrying back the losses to the prior two years can provide significant refund opportunities. For example, if you buy a large press in the specified bonus depreciation time frame and it creates a loss, you may carry back that loss on your C Corporation to the two prior years. Carry backs can also apply to S Corps and LLCs, although the losses pass through to your individual tax returns. If you haven’t had profits for a few years, then you can carry it forward instead of back.