This is part of a series of alerts about tax provisions in President Obama's stimulus bill, officially called the "American Recovery and Reinvestment Act of 2009."
Recovery Act Boosts Code Sec. 179 Expensing for 2009
Background and Old Law: Under Code Sec. 179, a taxpayer, other than an estate, trust, and certain noncorporate lessors, can elect to deduct as an expense, rather than to depreciate, up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in the taxpayer's trade or business (section 179 property). The non-indexed annual expensing limit for tax years beginning in 2008 was $250,000. Under pre-Act law, a taxpayer may annually expense up to $125,000 for tax years beginning after 2008 and before 2011, with this amount annually adjusted for inflation (for tax years beginning after 2008). Thus, the amount that could have been expensed under Code Sec. 179 in 2009 under pre-Act law was $133,000. For tax years beginning after 2010, the maximum amount will be $25,000, with no annual adjustment for inflation.
The amount eligible to be expensed for a tax year can't exceed the taxable income derived from the taxpayer's active conduct of a trade or business. Any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding tax years.
The maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of section 179 property placed in service during the tax year in excess of a specified investment ceiling. For tax years beginning in 2008, the investment ceiling limitation was $800,000. Under pre-Act law, for tax years beginning after 2008 and before 2011, this investment ceiling limit was $500,000, as annually adjusted for inflation (starting in tax years beginning after 2008). Thus, under pre-Act law, the investment ceiling limit was $530,000 for tax years beginning in 2009. For tax years beginning after 2010, the investment ceiling limit will be $200,000, with no annual adjustment for inflation.
New law: For tax years beginning in 2009, the Recovery Act increases the expensing limit to $250,000 and the investment ceiling limit to $800,000. The $250,000 and $800,000 amounts are not indexed for inflation.
Under the Recovery Act, most small businesses, and even some moderate sized businesses with moderate capital equipment needs, may be able to claim a full deduction for the cost of business machinery and equipment purchased in 2009, thereby reducing their effective cost for the assets. What is more, there is no alternative minimum tax adjustment for property expensed under Code Sec. 179.
Illustration 1: In 2009, calendar-year XYZ Corp purchases and places in service $800,000 of expensing-eligible property. It has $1 million of taxable income derived from the active conduct of its trade or business. If it elects to do so, XYZ can expense $250,000 of the property because it has not exceeded the investment ceiling amount. The $550,000 balance of its purchases may be eligible for bonus first-year depreciation (see discussion above).
Illustration 2: In 2009, calendar-year Widget Corp buys and places in service $825,000 of expensing-eligible property. Because it has exceeded the investment ceiling amount, Widget may expense $225,000 of its 2009 purchases [$250,000 - ($825,000 - $800,000)] and must depreciate the $600,000 balance of its purchases over a period of years.
For 2009, a taxpayer's expensing election is phased out completely under the investment ceiling limit only when its investment in qualified expensing-eligible property reaches $1,050,000.
The Recovery Act's increase in these limits to $250,000 and $800,000 is a temporary measure that only applies to 2009. Thus, unless there is further legislation, these limits will fall to $125,000 and $500,000 (as adjusted for inflation) for 2010, and then to $25,000 and $200,000 for 2011 and afterwards. Obviously, if you need to make capital expenditures, 2009 will be a good year to do so.
The increases in the expense limitation to $250,000 and in the ceiling limit to $800,000 are effective retroactively for property placed in service in tax years beginning after December 31, 2008, even though the Recovery Act was signed into law in February 2009.
About the Writer
Desmond G. Sheridan is a partner in the Greensboro law firm of Isaacson Isaacson Sheridan & Fountain, LLP and is a certified public accountant. His practice areas are business transactions, tax, corporations, limited liability companies, commercial real estate and estate planning. Sheridan has served on the Board of Directors of the North Carolina Association of Certified Public Accountants and has been recognized as a North Carolina "Super Lawyer" and a member of the "Legal Elite" by Business North Carolina. He has given numerous continuing education presentations to CPAs and attorneys.
