New Tax Relief Act gives small businesses quick shot in the arm

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in Small Business Tax,Small Business Tax Deduction Strategies

The intention of one of the biggest tax breaks in the new 2010 Tax Relief Act is that it will stimulate spending by businesses of all sizes.

Strategy: Loosen the purse strings this year. If you place qualified business property into service in 2011, you can claim 100% “bonus depreciation” for the property.   

That’s not a misprint. In effect, you can write off the entire cost of qualified property in just one year, with no limits on the amount!

Here’s the whole story: Bonus depreciation has been used as an enticement several times in the past. In the previous reincarnation, a business could qualify for 50% bonus depreciation for qualified business property placed in service from Jan. 1, 2010, through Dec. 31, 2010 (through Dec. 31, 2011, for certain longer-lived property, aircraft and transportation equipment). 

Unlike Section 179, bonus depreciation applies only to new (not used) property in these categories:

  • Property with a cost recovery period of 20 years or fewer
  • Depreciable software that is not amortizable over 15 years
  • Qualified leasehold improvements
  • Water utility property.

Assuming you qualified, computations were made in the following order: (1) Section 179 deductions, (2) bonus depreciation deductions and (3) regular depreciation deductions under the Modified Accelerated Cost Recovery System (MACRS).

New tax changes: Now, the new Tax Relief Act extends bonus depreciation through 2012 and doubles the pleasure for the last part of 2010 and all of 2011. Specifically, for qualified business property placed in service from Sept. 9, 2010, through Dec. 31, 2011 (through Dec. 31, 2012, for certain longer-lived property, aircraft and transportation equipment), you can claim 100% bonus depreciation. Then 50% bonus depreciation is available for qualified property placed in service from Jan. 1, 2012, through Dec. 31, 2012.

There’s no cap on the amount of the bonus depreciation deductions. In contrast, Section 179 deductions are limited to the amount of your taxable income from business activities. Another limit: For tax years beginning in 2011, the maximum $500,000 Section 179 deduction is reduced for purchases above a $2 million threshold.

The new Tax Relief Act can give a small business an immediate shot in the arm.

Example: You expect to realize taxable income of $75,000 from your business in 2011, but acquiring updated equipment would spur future growth. So you buy new equipment for $100,000 this year. Under the 100% bonus depreciation provision, you can write off the entire $100,000 in 2011, even though your Section 179 deduction would have been limited to $75,000.

Under prior law, a C corporation business could claim minimum tax credit or research credit carryovers in lieu of claiming bonus depreciation.

Tip: The new Tax Relief Act extends this option for 2011 and 2012.

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