If you have purchased equipment recently, or plan to in the future, you should check out this update. RightChoice Equipment Leasing is committed to researching and communicating equipment financing information that will benefit our present and future clients. Let us know if we can be of service and in the meantime, please enjoy this article.

Under current law, qualified property is allowed 50% depreciation (bonus depreciation) in the year that the property is placed in service (with corresponding reductions in basis and, thus, reductions of the regular depreciation deductions otherwise allowed in the placed-in-service year and in later years). Additionally, qualified property is exempt from the alternative minimum tax (AMT) depreciation adjustment.

Under pre-2010 Tax Relief Act law, the timely-placed-in-service requirement was that the property had to be placed in service by the taxpayer before Jan. 1, 2011, except for certain aircraft and certain long-production-period property that had to be placed in service before Jan. 1, 2012.

Important--New law – 100% bonus depreciation is allowed
after Sept. 8, 2010 and before Jan. 1, 2012.

The bonus depreciation rate now is 100% (resulting in temporary 100% expensing) for otherwise qualifying property that, generally, is (1) placed in service and acquired after Sept. 8, 2010 and before Jan. 1, 2012 or (2) acquired after Sept. 8, 2010 and before Jan. 1, 2012, but placed in service before Jan. 1, 2013 if the property is aircraft or long-production-period property.

§179 expensing limit

Under pre-2010 Tax Relief Act law, the §179 expense could not exceed $250,000 in the case of a tax year beginning in 2008 or 2009, and $500,000 (dollar limitation) in the case of a tax year beginning in 2010 or 2011. The maximum deductible expense had to be reduced (i.e., phased out, but not below zero) by the amount by which the cost of §179 property placed in service during a tax year beginning in 2008 or 2009 exceeded $800,000, and during a tax year beginning in 2010 or 2011, exceeded $2,000,000.

Under pre-2010 Tax Relief Act law, for tax years beginning after 2011, the dollar limitation (discussed above) was to be $25,000 and the phase-out amount was to be $200,000. The $25,000 and $200,000 amounts were not to be adjusted for inflation.

New Law

The 2010 Tax Relief Act provides that, for tax years beginning in 2012, the dollar limitation on the §179 expense deduction will be $125,000. The reduction in the dollar limitation will start to take effect when property placed in service in a tax year exceeds $500,000 (beginning-of-phase-out amount).

Thus, for tax years beginning in 2012, the maximum amount a taxpayer will be able to expense will be $125,000 of the cost of qualifying property. The $125,000 amount will be reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the tax year exceeds $500,000. Accordingly, for property placed in service in tax years beginning in 2012, the §179 deduction will phase out completely when the cost of the property exceeds $625,000 ($500,000 (phase-out amount) + $125,000 (dollar limitation)).

While the 2010 Tax Relief Act increases the dollar limitation and phase-out amount to $125,000 and $500,000, respectively, for tax years beginning in 2012 from what they otherwise would have been under pre-2010 Tax Relief Act law ($25,000 and $200,000), those amounts will actually decrease from their 2010 and 2011 levels ($500,000 and $2,000,000, respectively).

Always consult your financial professional to safeguard your tax complience position.

Contact us, if we can be of further service.