Last December President Obama and Republican legislators negotiated and Congress passed a comprehensive set of income tax, estate tax, and unemployment insurance provisions. The legislation keeps intact for two more years, America’s existing tax rate structure, temporarily fixes the AMT, and most importantly for business, provides a number of incentives for investment in machinery and equipment. This new tax law may affect your business in several ways, starting January 1, 2011. There are two key provisions that are available in this package:
(1) For investments placed in service after September 8, 2010 and through December 31, 2011, the bill provides for 100 percent bonus depreciation. For investments placed in service after December 31, 2011 and through December 31, 2012, the bill provides for 50 percent bonus depreciation. This means you can fully depreciate (take as an expense) the cost of any business asset purchased this year. The provision also allows taxpayers to elect to accelerate some AMT credits in lieu of bonus depreciation for taxable years 2011 and 2012.
(2) Section 179 Depreciation Provisions have been extended through 2011. These provisions were set to expire at the end of 2010. Accelerated depreciation deductions can apply to investments without regard to $500,000/$2,000,000 limits. For 2012 the maximum amount will be $125,000 (indexed for inflation) and $500,000 phase-out level. So what types of business property does Section 179 apply to? The IRS says it must be “tangible, depreciable, personal property which is acquired for use in the active conduct of a trade or business.”
With these provisions there are a number of questions. Does it make sense, should you purchase it outright or should you lease? It actually it might be better to lease as you can deduct the full amount of the equipment, without paying the full amount this year. The amount you save in taxes might actually exceed the payments, making leasing a very bottom-line friendly deduction. Although every decision and each tax situation is different, don’t assume anything. Make sure that you check with your tax advisor to determine what the best decision is for your business. But remember; Temporary is the key message of this legislation and its provisions are Temporary. These actions are two year fixes that impact 2011 and 2012 only! If you have or are considering investing in your business, this year is probably the best opportunity, tax wise, to act.
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