SOURCE: Thomson Reuters Corporation

December 06, 2010 14:00 ET

There's Still Time to Write Off Up to $500,000 in Asset Purchases for 2010

Thomson Reuters Analyst Describes Year-End Tax Planning From Code Sec. 179 Expensing Deduction Increase

NEW YORK, NY--(Marketwire - December 6, 2010) - The Small Business Jobs Act of 2010 significantly increased the Code Sec. 179 expense deduction level and, for the first time, made certain real estate assets eligible for expensing. "This provides many businesses with a lucrative opportunity to buy machinery and equipment and to expense eligible qualified real estate purchases in 2010," said Lesli S. Laffie, senior tax analyst for the Tax & Accounting Business of Thomson Reuters.

Under Code Sec. 179, certain taxpayers can deduct as an expense (rather than to depreciate over a number of years) up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in the taxpayer's trade or business. This includes "off-the-shelf computer software" acquired and placed in service in a tax year before 2012, and up to $250,000 of the cost of ''qualified real property" acquired and placed in service in tax years 2010 and 2011. The maximum annual expensing amount generally is reduced by the amount of Code Sec. 179 property placed in service during the tax year in excess of a specified investment ceiling. The amount eligible to be expensed for a tax year cannot exceed the taxable income derived from the taxpayer's active trades or businesses. Any amount not allowed as a deduction because of the taxable income limit can be carried forward to succeeding tax years.

New, higher expensing limits: For tax years beginning in 2010 and 2011, the dollar limit on the expense deduction is $500,000 (up from what would have been $250,000 for 2010 and $25,000 for 2011). The investment-based reduction in the dollar limit starts to take effect when property placed in service in a tax year exceeds $2,000,000 (beginning-of-phase-out amount, up from $800,000 for 2010 and $200,000 for 2011). For tax years beginning after 2011, the dollar limit on the expense deduction decreases to $25,000, and the beginning-of-phase-out amount decreases to $200,000.

"These changes mean that almost all small businesses and many medium-sized businesses that have modest machinery and equipment needs will be able to use expensing," said Laffie. For property placed in service in a tax year beginning in 2010 (or 2011), the Code Sec. 179 deduction will not phase out completely until the cost of expensing-eligible property exceeds $2,500,000 ($2,000,000 [beginning-of-phase-out amount] plus $500,000 [dollar limit]).

End of year is fine: If the deduction is allowable, the amount that can be expensed is the same, regardless of when the property is placed in service during the year. "Thus, property acquired and placed in service at the end of the 2010 tax year, rather than at the beginning of the 2011 tax year, can result in a full expense deduction," said Laffie. "When possible, taxpayers should factor the annual expensing limit into their equipment purchase plans to maximize the write-off for 2010."

Example: During the first eleven months of 2010, company XYZ, a calendar-year corporation, bought and placed in service $200,000 of expensing-eligible property. It plans to buy an additional $700,000 of expensing-eligible property in early 2011. If it is feasible to do so from a business perspective, company XYZ should consider accelerating $200,000 of 2011's planned purchases into 2010 (and place those additional assets in service before year-end), so that company XYZ will be able to fully expense all of its purchases (total of $400,000 for 2010 and $500,000 for 2011).

Taxable income limit: The Code Sec. 179 expense deduction is limited to taxable income from the taxpayer's active trades or businesses. The taxable income limit does not prohibit an expense deduction if the particular business in which the property is used does not produce a net income. If the taxpayer has aggregate net income from all their trades or businesses, the deduction is allowed. In general, any amount that cannot be deducted because of the taxable income limit can be carried forward to later years until it is fully deducted. Therefore, "taxpayers should consider making the expense election even in a year when, because of the taxable income limit, less than a full tax benefit will be derived," said Laffie. "This will preserve the taxpayer's right to carry the expensing deduction forward to other years." If the expense deduction is not taken, the taxpayer can recover the cost of the investment through depreciation deductions.

Wages count: Wages, salaries, tips and other compensation earned by employees are eligible for purposes of their Code Sec. 179 taxable income limit. "This means that employees who have a side business may be able to reduce their 2010 tax liability by buying business equipment they need before the end of 2010, rather than in 2011," said Laffie.

Example: Mr. Smith is employed as a computer expert, earning $75,000 in 2010 from that job. He also runs his own computer consultancy and will earn $2,000 in 2010 from that business. Mr. Smith is planning to buy $3,000 of computer equipment for his sideline business. If he buys and places the equipment in service in 2010, he will be able to offset $1,000 of his regular employment income and fully offset his $2,000 freelance income.

Investment-based phase-out: Amounts ineligible for expensing due to excess investments in expensing-eligible property (e.g., more than $2,000,000 for tax year 2010) cannot be carried forward and expensed in a later year; they can only be recovered through depreciation. "If a business is not capital-equipment-intensive, it should try to avoid acquiring and placing in service more than the ceiling amount of expensing-eligible property during the tax year, if it is possible from a business standpoint to defer additional purchases," said Laffie.

Qualified real property: For the first time, within the overall limits of the Code Sec. 179 expense election, up to $250,000 of the cost of "qualified real property" placed in service in 2010 (and 2011) can be expensed, but the rules for both defining the types of qualifying property and for calculating the expense deduction, are complex. "A tax professional should be consulted before acquiring such property, to determine the tax benefits available," said Laffie.

Effect of changing tax rates: At this time, tax rates for 2011 are unknown. However, taxpayers who do not anticipate being subject to higher rates next year could consider reducing their 2010 income by accelerating deductions (such as by acquiring and placing in service Code Sec. 179 property before year-end). On the other hand, taxpayers who do anticipate being subject to higher rates next year might want to defer acquiring property and placing it in service until the 2011 tax year to take the expense deduction in that year. "Taxpayers should run the numbers to determine in which tax year to take the deduction to yield the greater benefit," Laffie advises.

Taxpayers should consult with a personal tax advisor before applying these or other tax strategies.

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