Bonus Depreciation was extended back in 2010 to assist businesses recovering from the Recession. In 2011, businesses could depreciate up to 100% of qualifying new equipment which then dropped to 50% in 2012. The deduction was set to expire at the end of 2012.

Eric Savitz reported for Forbes in “How the Fiscal Cliff Deal Boosts the Tech Sector” that Bill Whyman, ISI Group technology analyst, wrote in a brief research note, “We believe the major impact will be improved business confidence, leading to greater willingness of business to invest their record cash hordes. Both these measures also improve cash flow, and on the margin have a positive impact on spending.”

The tech sector isn’t the only sector pleased with the extension of bonus depreciation. Speaking of the passage of bonus depreciation, Dave Thompson, president of TEC Equipment Inc, told Transport Topics, that “not everybody was prepared to buy and now they might. That depreciation will be a bonus; 100% is better, but 50% is pretty nice.”

According to the IRS publication, “Bonus Depreciation and Increased Section 179 Deduction under the American Recovery and Reinvestment Act”

The bonus depreciation provision generally enables businesses to deduct half the cost of qualifying property in the year it is placed in service. You may be able to take an additional first year special depreciation allowance for certain qualifying property (defined below). The allowance is an additional deduction of 50 percent of the property’s depreciable basis (after any section 179 deduction and before figuring your regular depreciation deduction).

Property that qualifies for this special depreciation allowance includes the following.

• Tangible property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less
• Water utility property
• Off-the-shelf computer software
• Qualified leasehold improvement property

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As part of the U.S. American Taxpayer Relief Act approved by Congress on January 2, 2013, the New York Times reported that businesses can continue to “fully expense many items in just one year, instead of over five years or more. The amount of investment eligible for immediate expensing grew to $500,000 in 2010 and 2011, but was to fall to $139,000 in 2012 and $25,000 in 2013. The new law extends the $500,000 limit through 2013, and pushes the $24,000 cap to 2014. Section 179 is available only to companies with total capital expenditures for the year under a certain threshold – $2 million through 2013 and $200,000 starting in 2014.”

Section 179 of the IRS Code was enacted to help small businesses take a depreciation deduction for capital expenditures in one year, rather than depreciating them over a longer period of time. By taking the full deduction for the cost of the asset immediately, rather than being required to spread out the deduction over the asset’s useful life, businesses can realize a substantial tax savings.

What Kind of Equipment Does Section 179 Apply To?

Small businesses may deduct the cost of certain new and used equipment including tangible personal property. According to the IRS  to qualify for the section 179 deduction, your property must be one of the following types of depreciable property:

1. Tangible personal property.
2. Other tangible property (except buildings and their structural components) used as:

• An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services,

• A research facility used in connection with any of the activities in (a) above, or

• A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities

3. Single purpose agricultural (livestock) or horticultural structures. See chapter 7 of Publication 225 for definitions and information regarding the use requirements that apply to these structures.

4.Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum.

5. Off-the-shelf computer software.

Furthermore, the IRS publication “ Bonus Depreciation and Increased Section 179 Deduction under the American Recovery and Reinvestment Act” also states:

 To qualify for the section 179 deduction, your property must have been acquired for use in your trade or business. Property you acquire only for the production of income, such as investment property, rental property (if renting property is not your trade or business), and property that produces royalties, does not qualify.

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1. Your taxes are going up. Although the approved deal raises tax rates only on individuals with income over $400,000 and families with income over $450,000 (their top tax rates will increase to 39.6%, up from 35% in 2012), the deal did not save the Payroll Tax Holiday. Therefore, the payroll tax immediately rises back to its 2010 level resulting in a rate that increases from 4.2% in 2012 to a new rate of 6.2%. The Tax Policy Center reports that the “average federal effective tax rate will be 21.7 percent and the average increase is $1,257.”
2. Millions of taxpayers will be spared from the Alternative Minimum Tax. Time Magazine reports, “According to one GOP estimate, 28 million families would have had to pay an average of $3,400 in extra taxes this year without the AMT fix. About four million taxpayers owed the AMT in 2011, up from about 1.3 million in 2001, according to the Tax Policy Center.”
3. Phase-out of personal and dependent exemption deductions for married taxpayers with an AGI of $300,000 or more and single taxpayers with an AGI of $250,000.
4. Phase-out of itemized deductions if your AGI exceeds $250,000 for single taxpayers and $300,000 for married joint-filing taxpayers.
5. The American Opportunity Tax Credit, the Child Tax Credit and the Earned Income Tax Credit all survived and will be on the books for the next five years.
6. Section 179 has been increased retroactively for 2012 and 2013. With the new deal in place, Section 179 has been increased retroactively for 2012 from $139,000 back to $500,000. The new law extends the $500,000 limit through 2013, and pushes the $25,000 cap to 2014. Section 179 is available only to companies with total capital expenditures for the year under a certain threshold — $2 million through 2013 and $200,000 starting in 2014.
7. 50 percent bonus depreciation for capital expenditures has been extended through 2013.
8. The Research and Development Tax Credit has been renewed retroactively for 2012 and “prospectively for 2013.”

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