Bonus Depreciation and Increased Section 179 Deduction under the American Recovery and Reinvestment Act
The American Recovery and Reinvestment Act (ARRA), enacted in February 2009, extended the bonus depreciation and increased the section 179 deduction. For many businesses, these two provisions are only available this year and, as a result, they only have a few months to take action and save on their taxes. Here is a quick rundown of these provisions.
Many small businesses that invest in new property and equipment will be able to write off most or all of these purchases on their 2009 returns. The new law extends through 2009 the special 50 percent depreciation allowance, also known as bonus depreciation, and increased limits on the section 179 deduction, named for the relevant section of the Internal Revenue Code. Normally, businesses recover these capital investments through annual depreciation deductions spread over several years. Both of these provisions encourage these investments by enabling businesses to write them off more quickly.
The section 179 deduction enables small businesses to deduct up to $250,000 of the cost of machinery, equipment, vehicles, furniture and other qualifying property placed in service during 2009 ($285,000 for qualifying enterprise zone property and qualifying renewal community property). This limit is reduced by the amount by which the cost of section 179 property placed in service in the tax year exceeds $800,000. Without the new law, the limit would have dropped to $133,000. The existing $25,000 limit still applies to sport utility vehicles. A special phase-out provision effectively targets the section 179 deduction to small businesses and generally eliminates it for most larger businesses.
To qualify for the section 179 deduction, your property must be one of the following types of depreciable property.
- Tangible personal property.
- 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.
- 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.
- Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum.
- Off-the-shelf computer software.
- Machinery and equipment.
- Property contained in or attached to a building (other than structural components), such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment, and signs.
- Gasoline storage tanks and pumps at retail service stations.
- Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals.
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.
When you use property for both business and nonbusiness purposes, you can elect the section 179 deduction only if you use the property more than 50 percent for business in the year you place it in service. If you use the property more than 50 percent for business, multiply the cost of the property by the percentage of business use. Use the resulting business cost to figure your section 179 deduction.
To qualify for the section 179 deduction, your property must have been acquired by purchase. For example, property acquired by gift or inheritance does not qualify. Publication 946 explains various situations that describe property not acquired by purchase. There are also special rules for acquiring property from related persons. These rules are also explained in Publication 946.
Special depreciation allowance for certain property. 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
Qualified property must also meet all of the following tests.
- You must have acquired qualified property after December 31, 2007, and before January 1, 2009. If a binding contract to acquire the property existed before January 1, 2008, the property does not qualify.
- Qualified property must be placed in service before January 1, 2010 (before January 1, 2011, for certain transportation property and certain property with a long production period).
- The original use of the property must begin with you after December 31, 2007.
Property that does not qualify for special depreciation allowance includes the following.
- Property placed in service and disposed of in the same tax year.
- Property converted from business use to personal use in the same tax year it is acquired. Property converted from personal use to business use in the same or later tax year may qualify
- Property required to be depreciated under the alternative depreciation system (ADS).
- Property included in a class of property for which you elected not to claim the special depreciation allowance.
- Certain restaurant property placed in service after December 31, 2008.
- Certain retail improvement property placed in service after December 31, 2008.
- Property for which you elected to accelerate certain credits in lieu of the bonus depreciation allowance.
Depreciation limits on business vehicles: The total depreciation deduction (including the section 179 expense deduction) you can take for a passenger automobile (that is not a truck or a van) that you use in your business and first placed in service in 2009 is $2,960 ($10,960 for automobiles for which the special depreciation allowance applies). The maximum deduction you can take for a truck or van you use in your business and first placed in service in 2009 is $3,060 ($11,060 for trucks or vans for which the special depreciation allowance applies).
- Law Offers Special Tax Breaks for Small Business; Act Now and Save, IRS Says
- Publication 946, How to Depreciate Property (Chapters 1 and 2)