December tax package allows 100% writeoff to encourage investment

The federal tax relief act approved in December had a number of changes for businesses including a change to bonus depreciation and Section 179.

Much of the act simply modified and extended prior laws.

[caption id="attachment_28397" align="alignright" width="122" caption="Joni Fritsche"][/caption]

“The biggest impact for business owners is bonus depreciation and Section 179,” said Joni Fritsche, tax director with Burr Pilger Mayer in Santa Rosa.

For bonus depreciation from Jan. 1, 2010, through Sept. 8, 2010, 50 percent of certain purchases of equipment, machinery, qualified leasehold improvements and other assets could be deducted. From Sept. 9, 2010, to the end of 2011, 100 percent can be deducted. In 2012, it goes back to 50 percent.

This is used by all types and sizes of businesses, though there are certain stipulations.

“What Congress is doing in this area is economic planning and economic stimulus for a period of years on a moving forward basis,” she said.

When a business owner buys a new asset they can depreciate the item over the life of the equipment, but now it is being depreciated 100 percent in the same year as the purchase is made.

In a memo to clients, accounting services firm Moss Adams said that considering the 100 percent bonus depreciation is retroactive to September of last year, many companies may have overpaid their estimated taxes because they were under the impression that it was 50 percent depreciation. Companies that have done this can rectify this by filling out IRS form 4466.

Some used equipment and restaurant and retail improvements do not qualify for bonus depreciation, but they do qualify Section 179 expensing.

Regular depreciation for these qualified leasehold restaurant and retail improvements placed in service before Jan. 1, 2011, have a 15-year recovery period instead of the standard 39-year period.

A leasehold improvement is treated as qualifying property if it falls under the following requirements: it is to an interior portion of a building, the building is nonresidential real property, the improvement is made in accordance with the current lease and the improvement is placed in service more than three years after the date the building was first placed in service by any person.

It does not include any cost of expanding the building, any elevator or escalator, any structural component benefiting a common area or the internal structural framework of the building.

Another way Congress has tried to encourage spending is increasing Section 179 first year expensing.

For tax years 2010 and 2011, Section 179 deduction and investment limits are $500,000 and $2 million, respectively.

For tax year 2012, the act provides for a $125,000 deduction limit and a $500,000 investment limit. All of these dollar amounts are indexed for inflation.

“What bonus depreciation and 179 is doing is letting us deduct cost immediately so we have more money to spend and we are incentivized to go out and make these capital improvements,” Ms. Fritsche said. "You don’t see Congress coming out with the five-year plan, you see them putting more money in the business owner’s pockets to currently stimulate the economy."

She also noted that Section 179 can be applied to used assets and qualified leasehold restaurant and retail improvements.

The research and development credit was once again reinstated for 2010 and 2011.

“Congress didn’t make this permanent even though the Obama administration asked them to,” said Ms. Fritsche. Since the credit was introduced in 1981 it has been brought up every year, and every year Congress has reinstated it.

Work opportunity credit gives employers a credit of 40 percent of up to $6,000 of wages for hiring people in what are called targeted groups. This year unemployed veterans and some youth were added to the group.

There is also an adoption assistance exclusion creating an opportunity for employees to exclude from their gross income qualified adoption expenses paid for by the employer during 2010 of up to $13,170 of costs and for up to $13,360 in 2011 subject to adjusted gross income limits.