In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers may elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. As part of the Economic Stimulus Act of 2008, Congress temporarily increased the amount that small businesses could write off for capital expenditures incurred in 2008 to $250,000 and increased the phase-out threshold for 2008 to $800,000. The American Recovery and Reinvestment Act of 2009 (“the Recovery Act”), signed by President Obama on February 17, 2009, extends these temporary increases for capital expenditures incurred in 2009.

Qualifying property, such as furniture, fixtures, machinery and equipment, must be purchased and placed into service in 2009. However, real property, such as land and buildings normally depreciated over 39 years, does not qualify as Section 179 property.

The Recovery Act preserves the 2008 restrictions on the amount of qualifying Section 179 property that can be expensed. Under these restrictions, the $250,000 is phased out dollar for dollar when the total amount of qualifying property purchased in 2008 exceeds $800,000. This means that the ability to use this deduction is completely phased out when purchases exceed $1,050,000. Also, the deduction is disallowed if a taxpayer does not have taxable income in 2009.

Bonus Depreciation

The Economic Stimulus Act of 2008 also temporarily allowed qualifying businesses to recover the costs of capital expenditures faster than the ordinary depreciation schedule would allow by permitting these businesses to immediately write off 50% of the cost of depreciable property purchased in 2008 for domestic use. The Recovery Act extends this temporary benefit for qualifying property purchased and placed into service through December 31, 2009.

To be eligible to claim the bonus depreciation, the purchased property generally must share one of the following characteristics:

• A depreciation period of less than 20 years
• Off-the-shelf computer software – software that is not custom designed for your business and is available to the general public
• Qualified leasehold property – generally applies to leasehold improvements made to the interior portion of a building
• Qualified water utility property

The Recovery Act also extends an additional year of bonus depreciation, through 2010, for property with a recovery period of 10 years or longer, transportation property, and certain aircraft. The new law also extends the $8,000 increase in expensing limits for automobiles placed in service in 2009.

In addition, the new law extends the provision contained in the Foreclosure Prevention Act of 2008 that allows AMT and loss taxpayers in 2009 to receive 20% of the value of their old AMT or research and development (R&D) credits to the extent such taxpayers invest in assets that qualify for bonus depreciation.

How Can These Provisions Work For You?

Combining these key provisions of the Recovery Act can offer developers and contractors a variety of scenarios that can unlock significant tax savings opportunities in 2009. However, consulting with your real estate and construction tax professional is highly recommended to determine which scenario would best maximize your company’s tax savings and improve current year cash flow. For example, if you have maximized your Code Section 179 deduction of $250,000, you can then take the 50% bonus depreciation on the remainder of the qualifying assets. Also, unlike Code Section 179, you can utilize the 50% bonus depreciation regardless of your taxable income or loss.

In addition, the bonus depreciation provision provides significant tax planning opportunities for commercial building property owners that are considering a cost segregation study. In a cost segregation study, building components are broken out into various depreciation categories with corresponding depreciable periods. You can not only take advantage of the shorter depreciation period for components such as wiring and removable partitions, but you could also utilize the additional bonus depreciation in 2009 to recognize your depreciation benefit much faster.

Related posts:

1. New Recovery Act Expands Stimulus Relief to Real Estate and Construction Sector
2. Companies Starting to See Cash Flow Boost from Accelerated Depreciation
3. Repair or Replace? Tax Planning Should Guide Equipment Decisions