Last December, President Obama signed The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) in an effort to stimulate the economy. This legislation includes important depreciation and Internal Revenue Service Sec. 179 deduction changes to encourage spending by businesses. These changes were retroactive to Sept. 2010, and benefit both large and small businesses. If you’re planning to make a significant investment in your operations within the next five years, you need to review this important law change. So let’s take a look.
The new law allows 100 percent first-year bonus depreciation for qualifying new assets, such as boar and gilt breeding stock, equipment, fencing, furniture, grain bins, feed mills, land improvements, large trucks (for 100 percent business use and weighing over 6,000 pounds), machinery, most purchased software, sow and finishing barns, other farm buildings and qualified leasehold improvements acquired and placed in service between Sept. 9, 2010 and Dec. 31, 2011. The “placed-in-service” deadline is extended to Dec. 31, 2012 for certain assets that have longer production periods, including transportation equipment and aircraft.
Simply put, the taxpayer can expense 100 percent of the purchase price of new personal property acquired between Sept. 9, 2010 and Dec. 31, 2011.
The law allows 50 percent first-year bonus depreciation for eligible assets placed in service during the 2012 calendar year. Additionally, the placed-in-service deadline is extended to Dec. 31, 2013, for certain assets that have longer production periods.
For example, if you purchased a new Ford F-250 (five-year property) or put up new fencing (seven-year property) for $40,000, the depreciation deduction would be bonus depreciation of $20,000, plus the first-year depreciation of $3,000 or $2,142, for the products respectively. (See accompanying graph.)
In addition to the bonus depreciation change, the IRS in March issued the 2011 inflation adjustments to the depreciation limitations for automobiles and light trucks (weighing under 6,000 pounds). This year, the IRS has provided the limitation amounts for vehicles placed in service in 2011 that qualify for bonus depreciation and for those vehicles that do not qualify for the bonus depreciation.
• For new passenger autos used solely for business, which qualify for bonus depreciation, the depreciation limit is $11,060 for the first tax year.
• Light trucks and vans used completely for business, for which bonus depreciation applies, have a slightly higher limit of $11,260 for the first tax year.
For used or previously owned passenger automobiles (other than trucks or vans) placed in service during calendar 2011 to which bonus depreciation does not apply, the depreciation limit is $3,060 for the first tax year. For trucks and vans in this category, the limit is $3,260 for the first tax year.
With or without bonus depreciation, automobiles and light trucks are depreciated the same.
• For passenger automobiles, the taxpayer may take only $4,900 for the second tax year, $2,950 for the third tax year and $1,775 for each successive tax year.
• For light trucks and vans, the taxpayer may take only $5,200 for the second tax year, $3,150 for the third tax year and $1,875 for each successive tax year.
Other Provisions to Review
The 100 percent and 50 percent first-year bonus depreciation rules apply for both regular tax and alternative minimum tax purposes; therefore, assets subject to the bonus depreciation rules have exactly the same depreciation deductions for both regular tax and AMT purposes.
If a taxpayer determines that 100 percent bonus depreciation is not beneficial, it’s possible to take 50 percent bonus depreciation or no bonus depreciation. This election is made by asset class, so it’s not an all-or-nothing proposition.
Additionally, the 2010 Tax Relief Act extends the provision that allows C corporations to forgo bonus depreciation deductions and instead "free up" otherwise unusable research tax credit and minimum tax credit carryovers for qualified assets placed in service by Dec. 31, 2012 (Dec. 31, 2013 for certain long-lived assets).
Pork producers need to be aware of the increased benefits provided for in the recent tax relief act. Previously, most of your capital investments would not have qualified for Sec. 179 expensing. In 2003, Congress increased the IRS Sec. 179 deduction from $76,000 to $100,000 to induce businesses to invest in equipment. Now, with the new legislation in tax years 2010 and 2011, Congress has dramatically increased the maximum deduction to $500,000, with the deduction reduced dollar for dollar for any amount spent over $2 million.
In 2012, the tax benefit of Sec. 179 will be reduced to $125,000 (adjusted for inflation) with a phase-out threshold of $500,000. As a planning note, which pork producers should consider, if Congress does not extend this provision, beginning in 2013, the maximum deduction will be $25,000. This is a $475,000 reduction in the amount which can be expensed this year.
Eligible assets for the Sec. 179 deduction are similar to qualified bonus depreciation assets with the exception of land improvements. Nevertheless, pork producers may have several that would qualify for the Sec. 179 deduction that might at first appear to be land improvements. Some such assets include fencing, water wells, waste-water improvements, grain bins, other storage tanks and silos.
In contrast to qualified bonus depreciation property described above, Sec. 179 property can be either new or used. It’s important to note that Sec. 179 expensing can be combined with bonus depreciation for an even greater tax benefit. However, this deduction cannot create a net operating loss for the taxpayer. There is no such limitation on bonus depreciation deductions.
Additionally, in most cases, the Sec. 179 deduction can be a tool to reduce state income taxes, whereas bonus depreciation is disallowed by most state taxing authorities.
In the end, these 2010 tax changes will impact your pork business through 2012 and give you the opportunity to increase your after-tax cash flow and, ultimately, your bottom line. As always, for more information or specific questions about your situation, consult a tax professional.
Your 1st-Year Tax Deduction
Under the new law, there’s a 50 percent first-year bonus depreciation for eligible assets placed in service during 2012. For assets with longer production periods, the deadline extends to Dec. 31, 2013.
You may contact Scott Gammill, managing director of cost segregation services, Frost PLLC, at firstname.lastname@example.org or (501) 975-0120.
Rob Gunther is a CPA and tax partner with Frost. You may contact him at email@example.com or (501) 975-0112.