The Investment Scientist

Bonus Depreciation – Congress Wants Businesses to Invest in 2011

Posted on: May 7, 2011

[Guest Post by Jeremy Bendler, CPA] Businesses with cash reserves sitting on the sidelines are being encouraged to invest some of those funds in equipment and improvements in 2011. Congress has passed a number of favorable tax breaks for the treatment of business purchases of equipment and leasehold improvements including expanded section 179 expensing of assets, bonus depreciation, and relaxed auto depreciation rules. These incentives to spend and invest are hoped to help push the economy forward by giving businesses an incentive to invest!

In 2011 businesses can immediately expense up to $500,000 in qualified code section 179 property placed in service during the tax year. This amount is phased out dollar for dollar by the amount that qualifying purchases exceed $2,000,000. The 2011 amount of $500,000 far exceeds the maximum deductible expense for code section 179 property proposed for tax year 2012 of $125,000 (phased out when qualifying purchases exceed $500,000). In 2011 the definition of property qualifying for section 179 expensing also includes qualified leasehold improvement property, qualified restaurant property and qualified retail improvements. This expansion to include leasehold improvements will not be available in 2012. Section 179 expensing of property and improvements cannot be used to create a net operating loss, but unused amounts may be carried forward.

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Also available in 2011 in code section 168 is a provision allowing 100% bonus depreciation of qualified assets, including qualifying leasehold improvements. In order to be eligible for 100% bonus depreciation assets must be place in service after September 8, 2010 and before January 1, 2012. One of the main differences between section 168 and the aforementioned section 179 is that in order to qualify for section 168 bonus depreciation assets must begin their original use. This is to say that purchases of used assets do not qualify for section 168, but do qualify for section 179. Another difference is that there is no phase out associated with section 168 bonus depreciation. Conceivably an unlimited amount of qualifying purchases are eligible for 100% bonus depreciation in 2011. Bonus depreciation will revert back to 50% for 2012. Also, the section 168 bonus depreciation can be used to create a net operating loss which could potentially be carried back.

Code sections 179 and 168 do not apply to passenger automobiles, even if the auto is use solely for business. Luckily code section 280 provides bonus depreciation for passenger automobiles placed in service in 2011 in the maximum amount of $8,000. This is in addition to the standard depreciation allowed for passenger automobiles of $3,060 in the first year of service for a potential total of $11,060 in first year depreciation. This is certainly not as attractive as the immediate expensing of assets under section 179 or the 100% bonus depreciation under section 168, but it certainly makes purchasing an automobile in 2011 more attractive. Of course there is a special exception for heavy SUVs in the code. An SUV over 6,000 pounds is eligible for up to $25,000 in section 179 expense, and if the vehicle is used 100% for business the remaining value can be taken as 100% bonus depreciation in 2011. What an incentive to purchase a large SUV!

As you can see, congress has taken steps to encourage investment by businesses in 2011. Immediate expensing under code section 179, 100% bonus depreciation under section 168, and increased auto depreciation allowed under section 280 should help push business owners to deploy cash which has been held in reserve, expand and purchase assets. Even if businesses don’t have cash available, many vendors are offering attractive financing terms, but that is a topic for another article.

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2 Responses to "Bonus Depreciation – Congress Wants Businesses to Invest in 2011"

Does Bonus Depreciation apply to residential real property purchase for investment or for the production of income? My friend purchased a single family home in 2011. Does bonus depreciation apply to this asset category? Thank you.

Al, I don’t believe so. The best bet is to talk to your CPA.


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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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