Waiting Till Next Year Will Cost You When It Comes to Equipment Deductions

We all know this is the time of year that retailers want us to spend, spend, spend. Would you believe the IRS is also sweetening the pot for you to spend money this year?  Learn what deductions you have this year for equipment, furniture and machinery.  Next year you can only deduct half as much for these same items.

Guest Blogger, Sal Curcuru, CPA and Partner in Cucuru & Associates, shares his expertise in this 3 part Tax Law Update.  In Part 1, he explained the do’s and don’ts of home office deductions.  See Part 2 below and learn about the Allowable Immediate Deductions for Equipment, Furniture, and Machinery.  Stay tuned next week for Part 3: Allowable Deductions for personal property under Section 179.

Allowable Immediate Deductions for Equipment, Furniture, and Machinery

By: Sal Curcuru, CPA, JD, MBA

There are new depreciation rules that recently took effect that allow taxpayers to immediately deduct the cost of certain capital purchases such as computers, furniture, machinery and equipment. The new rules are referred to as Bonus depreciation. Bonus depreciation allows you to deduct the purchase price of certain assets much faster than if you had to follow the normal depreciation schedules.

The 2010 Tax Relief Act extends and expands additional first year depreciation to equal:

• 100 percent of the cost of qualified property placed in service between Sept. 9, 2010 and Dec. 31, 2011
• 50 percent of the cost of qualified property placed in service in 2012.

Example:  ABC Corp bought $1 million of assets on Oct. 1, 2010. It can fully deduct the $1 million of asset purchases in 2010. If it creates a net loss for the business, the loss can be carried back or carried forward.

Only assets that meet the following criteria are eligible for bonus depreciation:

It falls into one of the following categories:

1.   Property with a recovery period of 20 years or less

• which includes most physical assets other than real estate
• computer software (generally, off-the-shelf software)
• qualified leasehold improvement property
• ITS ORIGINAL USE BEGINS WITH THE TAXPAYER (I.E., IT IS PURCHASED NEW)

2.   Qualified leasehold improvement property means any improvement to an interior portion of a nonresidential building if such:

• improvement is made pursuant to a lease by the lessee, sublessee, or lessor of such improved portion
• portion is to be occupied exclusively by the lessee or sublessee
• improvement is placed in service more than three years after the date the building was first placed in service

Qualified leasehold improvement property does NOT include:

• an enlargement of a building
• any elevator or escalator
• any structural component benefiting a common area
• the internal structural framework of the building
• A lease between related persons (e.g., a lease between a taxpayer and his 80 percent owned business) does not qualify.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

For more information, visit the Curcuru & Associates, CPA, PLC website.