Tax Act Provides Business Owners with Incentive to Grow
 

In its continued effort to stimulate a stagnant economy, the Federal government has enacted legislation that resurrects, expands and enhances certain tax incentives.  These incentives relate to the acceleration of depreciation deductions for businesses.  It is the government’s expectation that the incentives will spur businesses to invest and receive an immediate benefit.

Bonus Depreciation is Back

The new law extends through December 31, 2010 (retroactive to January 1, 2010) a company’s ability to expense 50% of the cost of new, qualified tangible personal property purchased and placed into service in 2010.  The deduction is not limited by the size of the business or profitability.  There are certain classes of assets (namely assets with a life greater than 10 years or transportation property) for which the law extends through 2011.  To illustrate this, assume a company purchases a qualified asset for $10,000 that has a useful life of 5 years and was purchased in June, 2010.  The company would be allowed to take depreciation expense on this asset of $6,000 ($5,000 of bonus depreciation and $1,000 of regular depreciation on the remaining balance) versus $2,000 under the normal depreciation rules.

Passenger Automobiles

For passenger vehicles used greater than 50% in a trade or business, the amount of depreciation allowed in the first year has been increased by $8,000.  That means that the maximum amount of depreciation that could be taken on a passenger vehicle in 2010 would be $11,060 (light trucks $11,160).  This maximum must be reduced by the amount of personal use of the passenger vehicle.  A passenger vehicle is defined as a vehicle that has a loaded gross vehicle weight of 6,000 pounds or less.  Those over the 6,000 pound gross vehicle weight are not subject to the limitations.

Section 179 Increase

Section 179 is the term used (because that is the Internal Revenue Code Section it is under) to describe the ability of a small business to deduct as depreciation expense in one year a significant portion (if not all) of the cost of a qualified asset purchased.  The new law increases this amount to $500,000 for both 2010 and 2011.  As with bonus depreciation, the asset must be a qualified asset.  However, unlike bonus depreciation, there are certain limitations placed on the deduction.  First, your investment limit in qualified assets is limited to $2 million.  Any amounts over $2 million dollars reduce the one time write off on a dollar for dollar basis.  Additionally, the deduction cannot create a taxable loss.

Leasehold Improvements

The new law temporarily expands the definition of property that qualifies for Section 179 expensing to include “qualified real property.”  Previously, anything deemed real property was depreciated on a straight line basis over 39 years (non residential).  For 2010, a taxpayer can expense up to $250,000 of qualified real property. The new law defines qualified real property as one that falls into any of the following 3 categories:

Qualified Leasehold Improvements – For leasehold improvements to meet the definition of qualified real property, they must adhere to the following guidelines.   The property must be   non residential real property. The improvements must be to the interior portion of the building and used exclusively by the lessee. The building must have been in service for at least 3 years.  The improvements must be pursuant to a lease. The lease cannot be between related persons. Qualified leasehold improvements do not include improvements that are an enlargement of the building, elevator or escalator, a structural component that benefits a common area or structural framework.

Qualified Restaurant Property – Defined as “any improvement to a building if such improvement was placed into service and more than 50% of the building’s square footage is devoted to the preparation of, and seating for on-premises consumption of, prepared meals.”  The building must have been placed in service after December 31, 2008 but before January 1, 2010.

Qualified Retail Improvement Property – Like the other two categories, this category would also be property that normally has a 15 year recovery period.  As with qualified leasehold improvements, it only applies to the interior portion of the building and must be for areas open to the general public and used in a retail trade or business of selling tangible personal property to the general public. The building must have been placed into service at least 3 years prior.  Since the definition of Qualified Retail Improvement Property references Qualified Leasehold improvements, the same restrictions apply as to what qualifies.

For business owners contemplating the acquisition of new assets, the accelerated tax deductions made available in 2010 may create enough incentive to move forward and purchase assets.  The Federal government hopes these purchases will spur the economy out of its current malaise.

For more information on this topic, please contact Charlie Paolino at cpaolino@downeycocpa.com or 800-849-6022.