Make the most of your capital investments at tax time

March 10, 2012

Significant changes in the Internal Revenue Code will alter how you depreciate purchases of equipment, property and more. Find out what lies in store for your tax return with these changes.

Before we discuss planning options for 2012, here are some terms that are important to know.

Bonus depreciation. After the terrorist attacks of 2001, Congress added Section 168(k) to the IRC to allow for an immediate depreciation deduction for 30% of the purchase price of qualifying property. This differs from the Section 179 deduction in that it does not limit the amount of "bonus" depreciation you can claim. The original statute was scheduled to expire for assets acquired after 2004 but has been extended and expanded several times (including some special extensions and expansions in certain years for businesses in areas hit by natural disasters such as Hurricane Katrina). For qualifying assets placed in service from September 9, 2010, to December 31, 2011, the bonus depreciation rate was 100%. For 2012, qualifying assets will be subject to a 50% bonus depreciation rate, and the bonus depreciation is set to expire in 2013.

Qualifying property. This term has slightly different definitions for each of the previously mentioned terms.

For Section 179, qualifying property means tangible property that is used in your practice (equipment, furniture, software, etc.) and is not considered real estate (office and grounds) used by your business.

For bonus depreciation purposes, qualifying property generally is the same kind as for Section 179 but also includes certain other types of property (defined by the IRC as property that otherwise is eligible for tax depreciation over 20 years or less). To qualify for bonus depreciation, the first-time use of the property must begin with the taxpayer. Therefore used property purchased by the taxpayer can qualify for a Section 179 expense, but it cannot qualify for bonus depreciation.