The Depreciation Bonus: Congress Prescribes
Powerful Medicine for Economic Recovery

On Feb. 17, 2009 President Obama signed the American Recovery and Reinvestment Act (ARRA) into law. It includes significant incentives to encourage equipment purchasing this year.

First, the ARRA extends for one year (i.e., through the end of 2009) the 50 percent bonus depreciation first created in February 2008. Companies that buy equipment in 2009 will be able to depreciate an additional 50 percent of the cost of assets placed in service this year. Only new equipment is eligible.

For both the regular tax and the alternative minimum tax, the first-year depreciation deduction otherwise allowed on certain qualified tangible personal property acquired and placed in service during 2009 is increased by 50 percent of the cost of such property.

The ARRA also extended for one year the significantly increased Section 179 small business expensing levels. Without the economic stimulus law, the Section 179 small business expensing limit for this year would have been around $130,000 with a phase-out threshold of roughly $500,000. However, under the ARRA, for 2009 the expensing limit to $250,000 and the phase-out threshold to $800,000. Thus, in 2009, a small business can expense up to $250,000 as long as its qualified equipment purchases do not exceed $800,000. For each dollar that total equipment purchases exceed $800,000, the amount that can be expensed decreases by one dollar, so that a company that makes $1,050,000 in total purchases will not be able to expense anything (but could still claim the depreciation bonus).

For purposes of the Section 179, qualifying property is generally depreciable tangible personal property that is purchased for use in the active conduct of a trade or business. Unlike the depreciation bonus, both new and used equipment is eligible for Sec. 179 expensing.

The deductions provided by the asset expense election and bonus depreciation are illustrated by the following example:

Corporation X purchases and places in service machinery (5-year property) in its calendar 2009 tax year having a cost of $650,000, which will be subject to the half-year convention. Corporation X will elect to expense $250,000 under Sec. 179, leaving the machinery with a remaining depreciable basis of $400,000. Applying the bonus depreciation provided by the Act, Corporation X is entitled to a further deduction in 2009 of $200,000 (50% of $400,000), leaving the machinery with a remaining depreciable basis of $200,000. Standard first-year depreciation for 5-year property under the half-year convention is 20%, providing Corporation X with further depreciation on the machinery of $40,000. Accordingly, Corporation X is entitled to a total expense and depreciation deduction of $490,000 in 2009 on its $650,000 machinery. The remaining $160,000 cost of the property is recovered after 2009 under otherwise applicable rules for computing depreciation.

By increasing a company's tax deductions in 2009, the asset expense election and bonus depreciation help trim tax bills in the short term. However, because there will be less to depreciate in the future, the company's tax bill in later years may be higher.

For additional information on the depreciation bonus and a tax savings calculator, visit DepreciationBonus.org or visit the IRS publication on Section 179.

*Credit and equipment restrictions apply. This program does not assume the customer is eligible to take advantage of the IRS Section #179 depreciation schedule which allows rapid first year depreciation of certain assets acquired. The amount of previous depreciation they may have used may affect their ability to utilize the elections. The customer should consult their tax advisor or accountant for additional information.