All About Section 179 and Bonus Depreciation
(Current 2004 Tax Opportunity Expires by Year End)
*Section 179 allows businesses to immediately expense the first $100,00 plus of capital equipment purchased each year.
The tangible personal property
must be actively used for business purposes and have a depreciable life
of three years or more. Most commercial equipment meets the normal equipment
eligibility requirements under Section 179. In most cases, a $1.00 purchase
option lease would enable you to finance your capital equipment acquisition
and still benefit under Section 179
The Jobs and Growth Tax Relief Reconciliation Bill of 2003, signed into law on May 28, 2003, contains important provisions for equipment lessees and lessors. One of these provisions is the bonus depreciation which allows corporate taxpayers to deduct 50% of the original equipment cost in the first year, plus the normal MACRS depreciation on the remaining 50% of the original cost. This is an increase from the 30% bonus depreciation that was established by the Job Creation and Worker Assistance Act of 2002. All bonus depreciation rules expire on December 31, 2004 with some limited exceptions.
According to an article in the Wall Street Journal on March 10, 2004, “giving businesses more of a tax break on equipment purchases, … would motivate Corporate America to spend more freely…. To take advantage of the tax break, however, companies need to get their equipment in place by the end of 2004, so some companies likely will accelerate purchases they might have made in 2005….”
To qualify, property must be new property (not older than 90 days) with
a recovery period of 20 years or less. It must be acquired and put into
service on or after May 5, 2003 (as long as there was no written binding
contract for the acquisition prior to that date), and before January 1,
2005. The provision does not include any property to which the alternative
depreciation systems apply. Leasehold improvements to building older than
3 years are also eligible for bonus depreciation.
Planning note: Taxpayers who find that tax leasing is
more advantageous than an outright purchase should make sure that they
sign a written binding contract to lease this equipment and place the
asset in service prior to January 1, 2005, to ensure that the lessor and
the lessee can take advantage of these expiring tax laws. Once this law
expires, the original MACRS depreciation rules will be utilized and lease
rates will increase.
Coordination with Code Section 179*
For taxpayers who own the equipment for tax purposes, Code Section 179 expense allowance is claimed prior to the additional depreciation allowance. For example:
• A 5-year property placed in service in 2004
costs $200,000
• Taxpayer expenses $100,000 of the cost under
Code Section 179 ($100,000 allowed in 2004
and 2005; adjusted for inflation. Thereafter, the limitation is reduced
to $25,000 per year.).
• The taxpayer’s bonus depreciation is $50,000 ($100,000 x
50%).
• The depreciable basis after reduction by Code Section 179 expense
allowance and bonus depreciation is $50,000 ($200,000 - $100,000 - $50,000).
• In addition, the standard 1st year MACRS depreciation, in this
case, $10,000 is recognized.
• Your total first year deduction is $160,000.
This required order of allocation will reduce the size
of the bonus depreciation claimed on an asset for which a Code Section
179 expense allowance is claimed. (If bonus depreciation could be calculated
prior to reduction by any amount expensed under Code Section 179, the
bonus depreciation would have been $100,000 rather than $50,000.)
