Bonus Depreciation for 2013

The cost of property with a useful life longer than one year generally can’t be deducted in the year of acquisition. Instead, the cost is depreciated over a number of years. The depreciable life is prescribed by Congress and depends on the kind of property purchased, and on the type of business it’s used in.

Bonus depreciation allows the taxpayer to deduct a percentage of the cost in the year the property is placed in service. In 2013, the percentage allowed is 50%. The remaining 50% of cost is then depreciated over the life of the asset.

Restrictions

• The original use of the property must begin with the taxpayer – used property does not qualify.
• The property must be qualifying property – see below.
• Special limitations apply to purchases of certain autos and trucks.
• The property generally must be placed in service before Jan. 1, 2014. Certain property with a long production period is eligible if a written binding contract is in place before Jan. 1, 2014 and the property is placed in service before Jan. 1, 2015. However, only the costs incurred prior to Jan. 1, 2014 are eligible for bonus.

Qualifying property

The following types of property qualify for bonus depreciation:

• Property with a depreciation recovery period of 20 years or less. This includes most machinery & equipment, furniture &  fixtures, and certain land improvements.
• Off-the-shelf computer software.
• Qualified leasehold improvements. These are improvements made under a lease to a tenant-occupied space in a building which was placed in service more than three years earlier. Building enlargements, elevators and escalators, and improvements to common areas of a building do notqualify.
• Water utility property.

Comparison to Section 179

Important differences between bonus depreciation and Section 179 expensing include:

• Bonus depreciation can only be used on new property. Section 179 can be taken on new or used property.
• Section 179 expensing is limited to the taxable income for the year. Bonus depreciation is not limited to taxable income – it can create a loss.
• Eligibility for bonus depreciation is based on the calendar year. Eligibility for Section 179 is based on the taxpayer’s fiscal year. Fiscal year businesses need to carefully consider the timing of their acquisitions.

Section 179 can be used in conjunction with bonus depreciation. See the examples below.

Other considerations

Other factors to consider regarding bonus depreciation include:

• Many states do not follow federal bonus depreciation. Be sure to consider states when doing tax planning. Federal-state differences increase the accounting burden for assets.
• Bonus depreciation applies automatically. You don’t need to specifically claim it. However, a taxpayer can elect out of bonus depreciation. This election is done by class of asset – e.g., all 5-year assets.

Example 1 – No bonus depreciation

Bonus Corp., a calendar-year taxpayer, acquires $100,000 of equipment on May 15 with a depreciable life of 5 years. It elects out of bonus depreciation and doesn’t use Sec. 179.

The depreciation deduction for 2013 is $20,000.

Example 2 – Bonus depreciation

Same facts as Example 1, but Bonus Corp. does not elect out of bonus depreciation.

The total deduction for 2013 is $60,000 (bonus depreciation $50,000, regular depreciation $10,000).

Example 3 – Section 179 and bonus depreciation

Same facts as Example 2. Additionally, Bonus Corp. has enough taxable income to elect $40,000 of expense under Section 179 on the equipment.

The total deduction for 2013 is $76,000 (Section 179 $40,000, bonus depreciation $30,000, regular depreciation $6,000).

Note that Section 179 is taken first; then, bonus depreciation; then, standard depreciation.

What’s ahead

Unless Congress passes extending legislation, bonus depreciation will not be available for assets placed in service after Dec. 31, 2013 (except certain long production period property – see above).

The above information covers the basic elements of bonus depreciation. Many considerations go into each decision to acquire business assets, and many involve non-tax factors. However, bonus depreciation should play a role; accelerated tax benefits may enable you to obtain the property you need earlier and at reduced after-tax costs.