Year-End Planning: Making the Most of Quick Write-offs for Capital Expenditures

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Jim Wagoner, CPA | Partner, Director of Tax Services Group

Although bonus first-year depreciation and more-generous Code Sec. 179 expensing limits have been extended before, another lease on life for these tax breaks is far from certain this time around. Unless Congress acts, additional ‘bonus’ depreciation deductions equal to 50% of the adjusted basis of qualified property won’t be available after this year. Also, the Code Sec. 179 expensing limit is set to plummet to $25,000 for property placed in service next year. Thus, businesses planning to purchase machinery and equipment during the remainder of this year or early the next should try to accelerate their buying plans, if doing so makes sound business sense.

Buy Depreciable Property and Place It in Service This Year to Lock in 50% Bonus First-Year Depreciation

Under current law, a 50% bonus first-year depreciation allowance applies to qualified property acquired and placed in service after Dec. 31, 2011 and before Jan. 1, 2013.

The adjusted basis of qualified property is reduced by the additional 50% depreciation deduction before computing the amount otherwise allowable as a depreciation deduction for the tax year and any later tax year.

Illustration 1: ABC, Inc., a calendar-year business, needs to buy $500,000 of five-year MACRS property. If it does so before Jan. 1, 2013, and places the property in service before that date, ABC may claim a first-year depreciation allowance of $300,000 [($500,000 * .50 = $250,000 bonus depreciation) + ($500,000 ? $250,000 * .20 = $50,000 regular first-year depreciation)]. If it waits until 2013 to buy the assets, and bonus first-year depreciation isn’t extended, ABC’s regular first-year depreciation allowance using the half-year convention would be only $100,000 (20%).

How to qualify for bonus depreciation. In general, an asset purchased in 2012 qualifies for the bonus depreciation allowance if:

  • recovery period of 20 years or less; computer software; or qualified leasehold improvement property (i.e., certain interior improvements to nonresidential buildings).
  • It is placed in service before Jan. 1, 2013
  • Its original use commences with the taxpayer.

Last year for extra-generous luxury auto depreciation limits? If bonus first-year depreciation deductions come to an end at the close of 2012, so will the extra-generous first-year dollar limit on autos, light trucks, and vans. The first-year depreciation deduction for new vehicles that qualify for bonus depreciation is $8,000 more than the first-year depreciation limit that would otherwise apply.

For new vehicles bought and placed in service in 2012, and that qualify for bonus first-year depreciation, the boosted first-year dollar limit is $11,160 for autos (not trucks or vans), and $11,360 for light trucks or vans (passenger autos built on a truck chassis, including minivans and sport-utility vehicles (SUVs) built on a truck chassis).

Heavy SUVs, those that are built on a truck chassis and are rated at more than 6,000 pounds gross (loaded) vehicle weight, are exempt from the luxury-auto dollar caps because they fall outside of the definition of a passenger auto. Not more than $25,000 of the cost of a heavy SUV may be expensed under Code Sec. 179. However, with the 50% first-year bonus depreciation available for qualified assets bought and placed in service in 2012 (in addition to the $25,000 expensing allowance and regular depreciation), taxpayers buying and placing in service new heavy SUVs in 2012 may be entitled to write off most of the cost of the vehicle in the first year.