Tax Cut Extension- How It Applies To Equipment Leasing
In December 2010 President Obama signed into law a tax bill extending cuts for all Americans. The benefits range from tax cuts for millionaires and the middle class to longer-term help for the unemployed.
Business will benefit from the 100% expensing provision. For investments placed in service after Sept. 8, 2010, and through Dec.31, 2011, the bill provides for 100% bonus depreciation.
Operators will be able to depreciate 100% of equipment purchased in 2011. The bill also extends increases in the maximum amount and phase-out threshold under section 179, the association added. Under current law, a taxpayer with a sufficiently small amount of annual investment may elect to deduct the cost of certain property placed in service for the year, rather than depreciate those costs over time.
Expensing - One-year 100 percent depreciation. For 2012 Section 179 at $125,000 and $500,000 phase out – alas not continuing the much more beneficial $500,000 and $2,000,000 phase out which is still good for 2010. According to Joint Tax the provision in general extends the expensing to qualified property placed in service after September 8, 2010 and before January 1, 2012.
Boost to Section 179 Depreciation
Rather than depreciating business property over several years, Section 179 now allows a taxpayer to expense the entire cost of certain property in the year of purchase. The new law allows a Section 179 deduction for up to $500,000 in 2010 and 2011 for qualified property. If the total purchase of all acquired property exceeds $2 million, there is a dollar-for-dollar decrease in the allowable deduction.
Qualified property includes tangible personal property (such as equipment and furniture) and software that must be used more than 50% in a trade or business. Prior to this new act, real property (buildings and structural components, air and heating units) did not qualify for this special treatment. Now the definition of qualifying property expands to include ‘qualified real property,’ and limits the Section 179 deduction on this type of property to $250,000.
Qualified real property includes the following:
• Qualified leasehold improvements
These are improvements to interior parts of non-residential real property placed in service more than three years after the date the building was first placed in service. This does not include improvements to the exterior, elevators or escalators, common areas, or internal structural framework.
• Qualified restaurant property
A building or improvement to a building if more than 50% of the building’s square footage is devoted to preparation of and seating for on-premises consumption of prepared meals.
• Qualified retail improvement property
Improvements to non-residential real property if such space is open to the general public and used in the retail business of selling to the general public that meets the other definition of qualified leasehold improvements.
The Section 179 deduction is allowed to the extent of taxable income, with the remainder carried forward to the next year. Be careful, however, because Section 179 carry-forwards on qualified real property are not allowed beyond 2011.
Extension of ‘Bonus’ Depreciation
The bill also extends through 2010 the 50% first-year bonus depreciation that had expired. The allowance is 50% of the depreciable basis of qualified property for assets purchased and placed in service for 2010. To qualify, the property must be a new (not used) asset that has a depreciable tax life of 20 years or less, software, water-utility property, or qualified leasehold-improvement property.
Land improvements also qualify as eligible property and include items such as sidewalks, roads, fences, bridges, and landscaping. There are no purchase or income limitations as described in the Section 179 deduction, and many large businesses can benefit from taking this extended provision to offset taxable income.
New Reporting Requirements
The law provides for $12 billion of tax relief and builds in some revenue raisers to help foot that bill. One revenue booster requires informational reporting (typically 1099-MISC) on rental-property expense payments of $600 or more for individuals who receive rental income. There are exceptions to reporting requirements, such as for individuals who can show that the requirements create a hardship, individuals who receive rental income of a minimal amount, for members of the military who rent their principal residences temporarily. Further guidance on these exceptions should come out by the end of the year.
What This Means for Your Business
For many, 2010 may be a year when cash flow does not match taxable income, and businesses are striving to maintain their capital in the business instead of paying taxes. If qualified-asset purchases are less than $2 million, a Section 179 deduction can be taken to reduce taxable income.
In addition, if there are new land improvements or qualified asset purchases over $2 million, taxable income can be offset by taking the bonus 50% depreciation. Businesses can also elect to exclude real property from qualified Section 179 property if the regular $2 million cap is close to being reached. Whichever method is used, there are several strategies that may be implemented to defer taxation. In deferring taxation, property owners have additional cash available to grow their business.
SBJA and Section 179 Deduction (Adjustments)
A qualifying taxpayer can choose to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as section 179 property.
The Small Business Jobs Act (SBJA) of 2010 increases the IRC section 179 limitations on expensing of depreciable business assets and expands the definition of qualified property to include certain real property for the 2010 and 2011 tax years. Under SBJA, qualifying businesses can now expense up to $500,000 of section 179 property for tax years beginning in 2010 and 2011.
Without SBJA, the expensing limit for section 179 property would have been $250,000 for 2010 and $25,000 for 2011. The $500,000 amount provided under the new law is reduced, but not below zero, if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $2,000,000.
The definition of qualified section 179 property will include qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property for tax years beginning in 2010 and 2011.
Increased Bonus Depreciation for 2011
The bonus depreciation amount for business assets purchased in 2011 has increased to 100%. This means you can fully depreciate the cost of any business asset purchased next year. The bonus depreciation amount for business assets purchased in 2010 is 50%.
For additional information on how the tax cut extensions apply to your business consult a licensed CPA or attorney.
For addtional information on equipment lease financing contact the experts at Mazuma Capital 801.816.0800
Source:
IRS.gov
http://www.irs.gov/formspubs/article/0,,id=177054,00.html
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