To help a struggling economy, Congress has been using two incentives to encourage businesses to expend for capital equipment. Through 2011, new equipment (but not used) qualified for a 100% bonus depreciation deduction. But for calendar year 2012, the first-year bonus percentage drops to 50%, and for 2013 there is no bonus percentage. The 100% incentive for 2011 required that the asset must have been both legally acquired and placed in service by December 31, 2011.
The long-standing Section 179 first-year depreciation deduction was $500,000 for tax years beginning in 2011. But for a tax year beginning in 2012, this deduction is only $139,000. This first-year incentive deduction applies to both new and used assets, and is claimed before applying the 50% bonus for 2012.
As an illustration, assume that a farmer acquires $339,000 of various items of machinery and equipment during 2012. Up to $139,000 of Section 179 expense can be claimed, and that should be applied to used items rather than new equipment. That leaves the remaining $200,000 of cost to which the 50% bonus is applied for another $100,000 deduction (assuming this remaining $200,000 is all new equipment eligible for the percentage bonus). The remaining $100,000 is subject to the normal seven-year depreciation schedule. So, for this example under 2012 rules, there is $239,000 of first year deductions on total costs of $339,000.
The bonus depreciation provision applies to new acquisitions of assets that have a 20-year or shorter depreciation period. Consequently, farm machine sheds and shops, which are 20-year assets, qualify for bonus depreciation. If completed and placed in service during 2012, bonus depreciation applies to 50% of the cost with the remaining 50% depreciated over 20 years (1/2 year for the first year).
But note: There are some commentators that think that the President and Congress will go back to the $500,000 and 100% rules of 2011. I am watching for the upcoming debate on the 2% payroll tax for a hint of what Washington will do.
The long-standing Section 179 first-year depreciation deduction was $500,000 for tax years beginning in 2011. But for a tax year beginning in 2012, this deduction is only $139,000. This first-year incentive deduction applies to both new and used assets, and is claimed before applying the 50% bonus for 2012.
As an illustration, assume that a farmer acquires $339,000 of various items of machinery and equipment during 2012. Up to $139,000 of Section 179 expense can be claimed, and that should be applied to used items rather than new equipment. That leaves the remaining $200,000 of cost to which the 50% bonus is applied for another $100,000 deduction (assuming this remaining $200,000 is all new equipment eligible for the percentage bonus). The remaining $100,000 is subject to the normal seven-year depreciation schedule. So, for this example under 2012 rules, there is $239,000 of first year deductions on total costs of $339,000.
The bonus depreciation provision applies to new acquisitions of assets that have a 20-year or shorter depreciation period. Consequently, farm machine sheds and shops, which are 20-year assets, qualify for bonus depreciation. If completed and placed in service during 2012, bonus depreciation applies to 50% of the cost with the remaining 50% depreciated over 20 years (1/2 year for the first year).
But note: There are some commentators that think that the President and Congress will go back to the $500,000 and 100% rules of 2011. I am watching for the upcoming debate on the 2% payroll tax for a hint of what Washington will do.
