If you have been considering purchasing new computers, equipment, vehicles, or other assets for your business, it might be a good idea to make the purchase before ringing in the new year. This is because the Internal Revenue Code currently contains two provisions which allow immediate write-offs for certain qualified purchases (as opposed to gradual cost recovery over time in the form of depreciation deductions).
Section 179 Deduction. The maximum deduction allowed has been increased to $500,000 (instead of reverting to $25,000 as scheduled), and the maximum purchase price has been increased to $2 million. This includes new and used capital equipment. In addition, it includes software.
However, in order to qualify for the Section 179 deduction, the property must be acquired for use in your trade or business. For mixed use property (i.e. property used for both business and non-business purposes), the Section 179 deduction is still available if the property is used more than 50% of the time for business. In that case, the cost of the property should be multiplied by the percentage of business use, and the resultant business cost will be the basis for your Section 179 deduction. For the types of property that qualify for the Section 179 deduction, see the IRS website.
Section 168(k) Bonus Depreciation. Under Section168(k), a taxpayer is permitted to write off the entire purchase price immediately (as opposed to gradually recovering the cost through depreciation deductions over time). This is a big deal because the costs of these types of capital investments are typically recovered over a 7- to 15-year period. In some cases, the recovery period may even be 20 years. Significantly, Section 168(k) applies after the application of Section 179. This means that in cases where Section 179 does not allow immediate expensing of the full cost, the entire cost may, nevertheless, be deductible after application of Section 168(k). Note, however, that unlike Section 179, Section 168(k) only applies to new property. For more information regarding the types of property that qualify for the Section 168(k) deduction, see the IRS website.
Option to Opt Out of Bonus Depreciation. The IRS recently ruled that taxpayers may forego bonus depreciation at their option. It may seem illogical to forgo this kind of tax benefit. However, such abstinence is worth considering in cases where a business has expiring net operating losses or capital loss carryovers. In those cases, the loss carryovers should be used currently, and cost recovery deductions should be saved for later.