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Buying New Equipment? Major Depreciation Incentive Set to Expire at the End of the Year


Over the past several years, contractors generated significant tax deductions through bonus depreciation and Section 179 first year expensing.  For assets placed in service between September 9, 2010 and December 31, 2011, taxpayers could claim 100% bonus depreciation.  For assets placed in service in 2012, taxpayers could claim 50% bonus depreciation.  Going forward, however, there are no bonus depreciation incentives for 2013 and beyond.

For eligible property placed in service during tax years beginning in 2011, the maximum Section 179 deduction on equipment was $500,000.  This decreased significantly to $139,000 for assets placed in service during tax years beginning in 2012.   The Section 179 deduction for assets placed in service for tax years beginning in 2013 will revert to pre-legislation amount of $25,000 per year (adjusted for inflation).

This presents an opportunity for contractors.  Proper year-end tax planning can assist in evaluating equipment purchase decisions.  If you are estimating significant taxable income for 2012 and have equipment needs, year-end purchases of equipment could dramatically reduce taxable income.  For GAAP purposes, you can still use straight line depreciation and salvage values, thus maintaining GAAP basis income for purposes of bank and surety analysis, while minimizing taxable income.  If you wait until 2013 to purchase this equipment, you may only expense under Section 179 $25,000 of the purchase price (adjusted for inflation) and depreciate the remaining balance over five years.  Of course, cash flow and covenant issues would need to be evaluated when analyzing potential purchases.

As a reminder, the ability to claim bonus depreciation or Section 179 expense is subject to certain limitations.  In the case of bonus depreciation, the property must be original use, but income and total capital purchase limitations do not apply.  For section 179, taxpayers are limited to $560,000 total capital purchases in 2012 before the deduction begins to phase out.  In addition, business income limitations apply.