Business owners will want to watch Congress over the last two months of the year to see what happens with Section 179 expensing and bonus depreciation. The allowable deduction amounts for both are set to decrease sharply after 12/31/11.
What is Section 179?
Normally, the cost of assets such as vehicles and equipment, must be depreciated over time. For example, computers are required to be depreciated over 5 years. But under Section 179, a business can claim the full cost of the asset as a deduction in the year it is purchased and placed in service.
For 2011, a business could take a Section 179 deduction for up to $500,000 in asset purchases.
What is Bonus Depreciation?
Bonus depreciation is similar to Section 179, except bonus depreciation can only be claimed on brand-new assets (purchases of used assets qualifies for Section 179 but not bonus depreciation). Bonus depreciation is essentially an “extra” deduction that can be taken beyond the Section 179 deduction. For 2011, businesses can claim bonus depreciation of 100% of the cost of qualifying assets.
Changes Coming 12/31/11
Unless Congress extends the current provisions, the deductions allowable under Section 179 and bonus depreciation will not be nearly as generous. The Section 179 limit will drop to $125,000, and the bonus depreciation percentage will drop to 50%.
Of course, Congress could always vote to extend the existing provisions for 2012, or they could make other changes. Business owners will want to keep watching.
Further reading: Boston Globe, Generous Small Business Tax Deduction is Shrinking.