2011 Year End Tax Planning Opportunities - Capital Equipment

I know.  Summer just finished with the passing of Labor Day.  It's too early to think about year end tax planning.  Not so much...

Some business sectors of the economy are becoming stronger.  Encouraged businesses may be making decisions to buy additional capital equipment.  Planning opportunities remain related to bonus depreciation and Section 179 expenses deductions for 2011.

To encourage economic stimulus and job creation, Congress has enacted the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act of 2010). The Tax Relief Act of 2010 provides significantly increased incentives for business investment in capital and equipment, including a temporary extension of bonus depreciation, a bonus depreciation allowance of 100 percent of the cost of qualified property placed in service after September 8, 2010 and before January 1, 2012, and temporary increases in the deductible amount and investment limitation under Code Sec. 179 for tax years beginning in 2012.

The Tax Relief Act of 2010 extends the 50-percent first-year bonus depreciation allowance for two years to apply to qualifying property in service in the tax year through 2012 (through 2013 for certain longer-lived and transportation property). In addition, the provision expands the first-year bonus depreciation deduction to 100 percent of the cost of qualified property placed in service after September 8, 2010 and before January 1, 2012 (before January 1, 2013 for certain longer-lived and transportation property).

Under the extension provisions, a corporation also is permitted to increase the minimum tax credit limitation by the bonus depreciation amount with respect to certain property placed in service after December 31, 2010 and before January 1, 2013 (January 1, 2014 in the case of longer-lived and transportation property).

In addition to the bonus depreciation changes, the Tax Relief Act of 2010 increases the deduction and investment limits under Code Sec. 179. Generally, Code Sec. 179 permits a business that satisfies limitations on annual investment to elect to deduct (or “expense”) the cost of qualifying property rather than depreciate the cost over time. For tax years beginning in 2010 and 2011, taxpayers are permitted to expense up to $500,000 of the cost of qualifying property under Code Sec. 179, reduced by the amount by which the qualified investment exceeds $2,000,000. Qualifying property includes depreciable tangible personal property purchased for use in the active conduct of a trade or business. However, after 2011, the expense deduction limit of $500,000 was set to drop to $25,000. Similarly, the phase-out amount was scheduled to be reduced to $200,000.

To address this concern, the Tax Relief Act of 2010 increased the maximum amount a taxpayer may expense under Code Sec. 179 for tax years beginning in 2012 to $125,000 of the cost of qualifying property placed in service in the tax year, reduced, but not below zero, by the amount by which the cost of qualifying property placed in service in the tax year exceeds $500,000. These amounts are to be indexed for inflation. However, for tax years beginning in 2013 and thereafter, the maximum expense deduction permitted drops to $25,000 of the cost of qualifying property placed in service for the taxable year, with a maximum phase-out limit of $200,000, not indexed for inflation.

Tax planning action may be needed now to purchase and place qualifying equipment in service before the end of 2011.