Fixed Asset Provisions Set to Expire

The end of 2009 signals the expiration of various favorable tax provisions related to the purchase of equipment and capital improvements. Accelerating the purchase and placement in service of property could result in significant tax savings in 2009. Although there has been some discussion in Congress about extending some of these favorable provisions, it is far from certain that any or all of these provisions will be extended.

This article will detail some of the fixed asset provisions that are set to expire at the end of the year.

Additional 50% first-year depreciation allowance. For “qualified property,” defined as most types of new property (including computer software, but not including buildings), businesses can take an additional tax deduction equal to 50 percent of the cost of the property. The property generally must be acquired and placed in service before January 1, 2010, to qualify. In addition, a business can deduct an additional $8,000 of depreciation on the cost of qualifying automobiles. The depreciable basis of the property is reduced by the additional 50 percent allowance in order to compute annual depreciation deductions.

15-year depreciation for qualified leasehold, restaurant, and retail improvements. For qualified property placed in service before January 1, 2010, businesses can take advantage of a special 15-year depreciable life. This shortened depreciable life greatly accelerates depreciation deductions compared to the standard 39-year life.

Qualified leasehold improvements must be made to nonresidential property that has been placed in service more than three years ago (whether by the business or someone else). The improvements must be made to the interior of a building that is subject to a lease from an unrelated party in order to qualify. Qualified leasehold improvement property may also qualify for the additional 50 percent first-year depreciation deduction.

For property to qualify as restaurant property, it must either be a building or an improvement to a building placed in service during 2009, and more than 50 percent of the building’s square footage must be devoted to the preparation of or seating for the consumption of prepared meals. Qualified restaurant property and improvements are not eligible for the additional 50 percent first-year depreciation deduction.

Similar to qualified leasehold improvements, qualified retail improvements placed in service in 2009 are eligible for a 15-year depreciable life. Improvements must be made to the interior portion of a building that is open to the general public and used in the retail trade of selling tangible personal property, and the improvements must be made to a building placed in service more than three years ago. Unlike the requirements for qualified leasehold improvements, the property does not have to be subject to a lease. Qualified retail improvements are not eligible for the additional 50 percent first-year depreciation deduction.

These depreciation provisions can be used for qualified leasehold, restaurant, and retail improvements by either the tenant or the landlord of the property as long as the business claiming the depreciation deductions is the owner of the improvements.

Increased Section 179 expensing limitations. For qualifying assets placed in service in tax years beginning in 2009, the limits for the expensing of these assets under section 179 have been increased. The limitation on the deduction for tax years beginning in 2009 is $250,000. The deduction is reduced dollar-for-dollar when the amount of qualifying assets placed in service is over a predetermined investment cap. The cap has also been increased for tax years beginning in 2009 to $800,000. The section 179 deduction is limited to a business’ income, but for profitable small- and medium-sized businesses, these increased caps can provide valuable tax breaks. Unless these favorable tax provisions are extended, the Section 179 expensing and investment limits will return to $125,000 and $500,000 adjusted for inflation, respectively for tax years beginning in 2010.

By being aware of the available tax breaks for assets placed in service before 2010, a significant acceleration of tax deductions related to fixed asset additions can be achieved. Tax specialists at Marcum can help you take advantage of the provisions detailed above.