Section 179 Depreciation
Currently, Section 179 of the Internal Revenue Code allows taxpayers to deduct up to $500,000 of depreciation on qualifying new and used assets placed into service during the 2011 tax year, whether filing on a calendar or fiscal year end. However, this deduction begins to phase-out when the total cost of eligible assets placed into service during the year exceeds $2,000,000.
For tax years beginning in 2012, Section 179 deduction will be reduced to $125,000 (inflation-adjusted), with the phase-out threshold of $500,000 of eligible asset additions. For tax years beginning in 2013, current legislation has reduced the deduction to $25,000, with the phase-out threshold of $200,000 of eligible asset additions.
The Section 179 deduction cannot create or increase a taxable loss for the business. For pass-through entities (partnerships, LLCs, and S Corporations), a special exemption allows a taxpayer to use Section 179 to create a loss to the extent of owner's compensation. Any disallowed Section 179 depreciation may be carried forward into future years to offset taxable income.
For qualifying assets acquired and placed into service on or before 12/31/11, taxpayers are permitted to deduct 100% first-year bonus depreciation. Unlike Section 179, bonus depreciation only applies to new assets placed in service during the calendar year, not the taxpayer's filing year. Congress has extended the bonus depreciation deduction into 2012, but at a lower rate of 50%. It appears unlikely that any amount of bonus depreciation will be extended to assets placed in service after 12/31/12.
The following chart illustrates the effect of reduced first-year depreciation deductions on a similar qualifying $550,000 asset placed into service in the upcoming years:
First Year Total First-
Placed in Bonus MACRS Year
Service Section 1791,2 Depreciation3 Depreciation Deduction
2011 $ 500,000 $ 50,000 $ 0 $ 550,000
2012 $ 75,000 $ 237,500 $ 47,500 $ 360,000
2013 $ 0 $ 0 $ 110,000 $ 110,000
1Eligible $125,000 deduction for 2012 reduced by excess of asset cost over phase-out threshold.
2Current $25,000 deduction for 2013 reduced by excess of asset cost over phase-out threshold.
3100% of remaining cost after Section 179 taken in 2011, 50% of remaining cost taken in 2012.
Please contact us if you have questions regarding depreciation or if you wish to discuss tax planning strategies.