October 11, 2010
The Small Business Jobs Act of 2010: Effects on Depreciation
Under the Small Business Jobs Act of 2010, the Code Section 179 deduction has been substantially increased, the type of property which qualifies for Code Section 179 expense has expanded and first-year bonus depreciation has been extended.
Prior to the passage of the Act, Code Section 179 limited first year expensing to $250,000 for tax years beginning between January 1, 2008 and December 31, 2009. The $250,000 expense would be reduced by the amount of Code Section 179 property placed into service in excess of $800,000. These amounts were not adjusted for inflation and the amount of the Code Section 179 deduction is limited to the amount of taxable income; any amount that couldn’t be deducted because of the taxable income limitation can be carried forward indefinitely. Before the Act, these expensing would be limited to only $25,000 with a beginning of phase out amount of $200,000 for tax years beginning after January 1, 2010. The Act has increased the dollar limitation on the deduction to $500,000 and the beginning of phase-out amount was raised to $2,000,000 for tax years beginning in 2010 or 2011.
Prior to the Act, the property which qualified to be expensed under Code Section 179 was limited to depreciable tangible personal property, including “off the shelf” computer software which was placed in service in tax years beginning before January 1, 2011. The new law allows taxpayers to elect to treat up to $250,000 of qualified real property as Code Section 179 property for a tax year beginning in 2010 or 2011. For purposes of this section, qualified real property is defined as qualified leasehold property as described in Code Sec. 168(e)(6), qualified restaurant property as described in Code Sec. 168(e)(7) or qualified retail improvement property as described in Code Sec. 168(e)(8). With regards to Code Section 179 deductions for qualified real property, taxpayers should note that any unused deduction for this type of property can only be carried forward to a tax year beginning in 2011. If the deduction isn’t used in 2011, the carryover will be lost and there is no carryover for an unused deduction for qualified real property placed in service in 2011.
Prior to the Act, under Code Section 168(k) a taxpayer could claim a 50% bonus depreciation allowance in the year that qualified property was first placed in service. This allowance had expired at the end of 2009. The new law extends the 50% bonus allowance for one year which is retroactive to qualified property placed in service as of January 1, 2010.