The recent Small Business Jobs Act of 2010 extended two provisions that help business owners deduct asset purchases faster. The first provision allows 50% bonus depreciation on new assets purchased and placed in service during 2010 (this provision had expired December 31, 2009). The second provision increases the Section 179 expense allowance to $500,000. Section 179 is an election that can be made to immediately deduct the cost of certain assets.
Bonus depreciation allows you to deduct the purchase price of certain assets much faster than if you had to follow the normal depreciation schedules. Under bonus depreciation, you can immediately deduct 50% of the cost of eligible property. The remaining purchase price is depreciated over the asset’s useful life.
Example: You buy $100,000 of eligible property (defined below) during 2010. The annual depreciation under regular depreciation and bonus depreciation (assuming it’s 5 year property) is shown in the following table:
Year
|
Regular Depreciation
|
Bonus Depreciation
|
1
|
$20,000
|
$60,000*
|
2
|
$32,000
|
$16,000
|
3
|
$19,200
|
$9,600
|
4
|
$14,400
|
$7,200
|
5
|
$14,400
|
$7,200
|
Total
|
$100,000
|
$100,000
|
* The $60,000 is composed of 50% bonus depreciation ($50,000) plus regular depreciation on the remaining purchase price of $50,000 ($10,000).
What is Eligible Property for Bonus Depreciation?
Eligible property includes:
- tangible personal property with a recovery period of 20 years or less (which is pretty broad)
- it is placed in service before January 1, 2011
- certain long-period-production property and certain transportation property may be placed in service before January 1, 2012)
- its ORIGINAL use must begin with the taxpayer (i.e., it is new and not used property)
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.