bonus depreciation

More Businesses Now Qualify for Faster Write-Offs on Building Improvements

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qualified improvement propertyThe Protecting Americans from Tax Hikes (PATH) Act passed last year and provided taxpayers with goodies in time for the holidays. This post will focus on a new tax provision that helps taxpayers who make improvements to commercial buildings by making expenditures for these improvements eligible for bonus depreciation.

A prior post explaining the benefits to individual taxpayers can be found here.
A prior post explaining the favorable new rules for depreciation in general can be found here.

Background

Under prior law, qualified leasehold improvement property qualified for bonus depreciation. Generally, long lived assets have to be depreciated over a number of years. Leasehold improvement property is generally deducted over 39 years. Qualified leasehold improvement property can be deducted over 15 years. Additionally, since it qualified for bonus depreciation, 50% of the cost of the qualified leasehold improvements could be deducted in the year the improvements were placed in service.

Example: ABC Corp spends $200,000 to remodel its leased space. Before the favorable qualified leasehold improvement property rules took effect, the $200,000 would have to be deducted over 39 years ($5,128 each year for 39 years).

Under the favorable qualified leasehold improvement property rules, 50% of the $200,000 can be deducted in the year of service and the remaining $100,000 cost can be deducted over 15 years (or $6,666 per year). The total first year depreciation expense is $106,666 (substantially more than the $5,128 that would apply without these rules)

Qualified leasehold improvement property included any improvement to the interior of a commercial building if:
• The improvement was made pursuant to a lease
• The interior building portion was to be occupied by the lessee or sublessee
• The improvement was placed in service more than 3 years after the building itself was first placed in service by any person
• The improvement was a structural component of the building

Qualified leasehold improvement property did not include expenses for:
• An enlargement of a building
• Any elevator or escalator
• Any structural component of a common area
• The internal structural framework of the building

Unfortunately, the qualified leasehold improvement property rules did not apply if the building owner was related to the tenant.

The New Law

Beginning in 2016, qualified improvement property is eligible for bonus deprecation. Now, bonus depreciation applies to qualified improvements to commercial buildings regardless of whether the building is leased or owned.

The definition of qualified improvement property has also been expanded.

Qualified improvement property is any improvement to an interior portion of a commercial building if the improvement is placed in service after the date the building is first placed in service. The improvement no longer needs to be placed in service more than 3 years after the building was first placed in service.

The definition of qualified improvement property now also applies to structural components of a building that benefit a common area.

Unfortunately, qualified improvement property still does not include any improvement for which the expense is attributable to: the enlargement of the building; any elevator or escalator; or the internal structural framework of the building.

To see how this applies to you, give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

 

Business Tax Benefits Extended for 2014 Tax Returns

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In a prior post, I listed some of the beneficial tax provisions affecting individual taxpayers.  This post lists some of the most popular tax extensions for businesses.

First Year Expensing of Business Asset Purchases

Section 179 allows businesses to deduct up to $500,000 of qualifying asset purchases in the year the asset is placed into service.  If this law had not been extended, first year expensing would have been limited to only $25,000.

50% Bonus Depreciation

Normally, when you buy long lived property, you can’t deduct the full cost of the property in the year you purchase it.  The purchase price is deducted over the expected life of the property.  Bonus depreciation allows 50% of the cost of qualifying property to be deducted in the year the asset is placed into service.

Accelerated Depreciation of Qualified Leasehold, Restaurant, and Retail Property

In 2010, Congress passed a law that allowed a $250,000 Section 179 deduction on qualifying real property.  The law allowed Section 179 deductions on real property placed in service during 2010 and 2011.  The law has been extended through 2014.

Research & Development Tax Credit

This is a general business tax credit for companies that incur R&D expenses in the U.S.  This credit has repeatedly been extended since its original passage in 1981.

The Work Opportunity Tax Credit

The Work Opportunity Tax Credit is available for a portion of first-year wages paid to certain qualifying employees who begin work during 2013 (now extended through 2014).  The credit is available for employers who hire members of the following targeted groups:

  • Veterans
  • Ex-felons
  • Long term family assistance recipients
  • Vocational rehabilitation referrals
  • Summer youth employees
  • Nutrition assistance recipients
  • Social security income recipients
  • Designated community residents
  • Qualified IV-A recipients

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

 

Depreciation Limits on Heavy SUVs

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Since 2003, the Section 179 deduction has exceeded $100,000.  For a brief period of time, business owners could purchase SUVs with a gross vehicle weight rating over 6,000 pounds and write off the full purchase price via the Section 179 deduction.

Example:  It is 2003 and Andy buys a $60,000 Cadillac Escapade that he uses 100% for business.  Since this vehicle’s gross weight rating was over 6,000 pounds, Andy could take a full $60,000 Section 179 deduction for the purchase price of the vehicle.

The party ended on October 22, 2004.  After this date, the Section 179 deduction is limited to $25,000 for SUVs with a gross weight rating between 6,001 and 14,000 pounds.

Example:  It is 2005 and Barney buys a $60,000 Cadillac Escapade that he uses 100% for business.  Since the vehicle’s gross weight rating is between 6,001 and 14,000 pounds, the Section 179 deduction is limited to $25,000.  Barney may then claim regular depreciation on the remaining $35,000 purchase price of the Escapade (which will be deducted over the 5 year life of the vehicle).

Depreciation per Year is as Follows:

                Section 179         Regular Depreciation

2005       $25,000                $7,000

2006                                  $11,200

2007                                  $6,720

2008                                  $5,040

2009                                  $5,040

 

The heavy SUV rule applies to Section 179 expense, it does not limit the amount a taxpayer can deduct through bonus depreciation.  Therefore, the heavy SUV rule will not affect the amount a taxpayer can deduct through 50% bonus depreciation for 2012.

Example:  It is 2012 and Opie buys a $60,000 Cadillac Escapade that he uses 100% for business.  Since the vehicle’s gross weight rating is between 6,001 and 14,000 pounds, the Section 179 deduction is limited to $25,000.  However, Opie may still claim the full amount of 50% bonus depreciation on the vehicle.   

Depreciation per Year is as Follows:

                Section 179         50% Bonus Depreciation               Regular Depreciation

2012       $25,000                $17,500                                      $3,500

2013                                                                                  $5,600

2014                                                                                  $3,360

2015                                                                                  $2,520

2016                                                                                  $2,520

As you can see, 50% bonus depreciation helps taxpayers accelerate the timing of their depreciation deductions.

The reduced Section 179 deduction applies only to vehicles that are SUVs.  The following types of vehicles are not considered SUVs and are allowed a full Section 179 deduction ($139,000 in 2012).

  • Vehicles designed to fit more than nine passengers behind the driver’s seat—for example, a shuttle van
  • Vehicles equipped with a cargo area that is not readily accessible directly from the passenger compartment and that is at least six feet in length.  Many pickups with full-size cargo beds will qualify for this exception
  • Vehicles with (1) and integral enclosure that fully encloses the driver’s compartment and load carrying device, (2) no seating behind the driver’s seat, and (3) no body section protruding more than 30 inches ahead of the leading edge of the windshield.  Many delivery vans will qualify for this exception

The IRS’ concern was that luxury SUVs which are purchased primarily for personal reasons were being rapidly depreciated.  The three exceptions above are for vehicles that are essentially purely business vehicles that have no personal pleasure element.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

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

 

You’re Still Getting a Bonus (Depreciation) in 2012

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Normally, when you buy long lived property, you can’t deduct the full cost of the property in the year you purchase it.  The purchase price is deducted over the expected life of the property.  In late 2010 through 2011, business owners were allowed to immediately deduct 100% of the cost of certain assets.  This was known as 100% bonus depreciation.  100% bonus depreciation ended on December 31, 2011.  Bonus depreciation is alive and well in 2012; however, it has been reduced to 50% from 100%.  50% bonus depreciation lasts through December 31, 2012.  It is extended to December 31, 2013 for property having a longer production period (discussed later).

What is Eligible Property?

To be eligible for bonus depreciation, the property must meet three criteria:

1.  The asset must be qualified property

  • The asset must have a recovery period of 20 years or less.  This includes most tangible personal property.  It excludes almost all real estate.
  • General purpose buildings used in agriculture, such as machine sheds and shops, are 20 year property and are eligible for bonus depreciation
  • Off the shelf software qualifies
  • Qualified leasehold improvement property qualifies

2.  The ORIGINAL use must commence after December 31, 2007

  • The asset must generally be NEW.  Used property doesn’t qualify.
  • New property initially used by a taxpayer for personal use and subsequently converted to business use meets the original use requirement
  • Expenditures to recondition or rebuild assets satisfies the original use requirement, but purchases of reconditioned or rebuilt assets do not qualify.  However, an asset that contains used parts will not be considered used if the cost of the used parts is 20% or less of the total cost.

3.  The asset must be acquired and placed in service on or before December 31, 2012

  • The placed in service requirement is extended to December 31, 2013 for property that has a longer production period and has an expected life of at least 10 years OR is commercial transportation property or certain aircraft.
  • A longer production period is defined as exceeding two years OR an estimated production period exceeding one year and a cost exceeding $1 million.
  • Only costs attributable to production before January 1, 2013 will qualify for this exception.

Qualified leasehold improvement property also qualifies for 50% bonus depreciation.  Qualified leasehold improvement property meets the following tests:

  • The improvement is to an interior of a building
  • The building is nonresidential
  • The improvement is made pursuant to a lease by either the lessee, sublessee, or by the lessor to property to be occupied by the lessee or sublessee
  • The improvement is placed in service more than three years after the date the building was first placed in service by any person
  • Leases between related parties do not qualify

Call us if you would like to discuss how this applies in your business.

 

Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

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

 

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