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Fixed assets and year-end planning

December 07, 2009

For many businesses, a new piece of equipment can be more just a good investment; it is often the easiest way to knock down an income tax liability. Changes in the tax rules that take effect after this year make fixed-asset planning especially important this year.

20091207-3.jpgBonus Depreciation: "Stimulus" legislation allows taxpayers who buy new property to get "bonus" depreciation equal to half of the cost of the property in the year it is placed in service, with the balance depreciated over the regular life of the property. For five-year property, this lets taxpayers recover 60% of the cost in the property's initial year. For most property (aircraft is a limited exception), this rule expires for property placed in service after December 31.

Section 179 allows taxpayers to deduct currently property that would otherwise be capitalized and depreciated. Under the "stimulus" legislation, taxpayers can elect Section 179 treatment for up to $250,000 of property for year. Unless Congress acts -- which isn't imminent -- this number goes down to $134,000 in 2010.

These provisions give taxpayers some flexibility to manage their 2010 taxable income, but they need to keep some things in mind:

- Bonus depreciation only applies to new property; Section 179 applies to both new and used equipment.

- Bonus depreciation can create or increase a net operation loss, enabling taxpayers to recover taxes paid in prior years; Section 179 is limited to active business income.

- While Section 179 starts to phase out dollar-for-dollar as property placed in service in the year exceeds $800,000, there is no such limit for bonus depreciation property additions.

- Neither Section 179 nor bonus depreciation are allowed for buildings.

- "Placed in service" isn't the same as "bought" or "ordered." It's probably not enough to have the equipment sitting in shipping containers on your loading dock at year-end. It needs to be put together and ready to go.

- Iowa does not recognize bonus depreciation or the $250,000 Section 179 limits; the Iowa Section 179 limit for 2009 is $133,000.

Remeber that there is a potential trap for some taxpayers who rush property into service before year-end: the "mid-quarter convention" rules. We'll disuss them tomorrow.

This is part of the Tax Update's series of 2009 year-end tax tips. Collect them all!

Flickr image by infraredhorsebite, / CC BY 2.0

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Do you see many taxpayers upgrading their vehicles or equipment, even though it's not a good economic move (they don't need new vehicles or equipment), just to avoid paying taxes on the income? It really does make just spending the money whether you need new things or not appealing when everything is at least 40% off (35% Federal income taxes at least 5% state income taxes).

Shane, that's an excellent point. Sadly, it does happen.

Good fixed asset planning should be a matter of looking at what you need and determining when to pull the trigger, not buying things you don't really need. Unsophisticated taxpayers sometimes buy things just to get a deduction, which makes no sense.

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