Writing Off Equipment Purchases in 2009 Can Be Tricky

Generally, assets (equipment) other than real property, leasehold improvements and certain farm structures acquired by a small business can be written off using three provisions of the tax law or combinations of the three. Choosing the right provision or a combination of provisions can have a significant impact on your taxes in 2009 and future years, so careful planning is required for any significant purchases made in 2009. The three write-off methods are outlined below so you can better understand the tax implications of using them.

• Section 179 Expense Deduction – This is a provision that permits a business to write off any portion of the cost of a newly-purchased asset in the first year it is placed in service. The first-year write-off cannot exceed the greater of the taxable income from all of the taxpayer’s active trades or businesses or the annual cap, which for 2009 is $250,000 ($125,000 for married taxpayers filing separately). Any amount which can’t be deducted in one tax year because of the taxable income limit may be carried over to the next year and added to the cost of qualifying property in that year. There is also an investment limit of $800,000, which is rarely encountered by small businesses.

Should the asset be taken out of service before the end of the normal useful depreciable life of the asset, then the Section 179 deduction will be recaptured in that year to the extent it exceeds the otherwise allowable MACRS depreciation.

When combining the three write-off provisions, the Section 179 allowance must be taken first and reduces the basis of the property before the application of the other two provisions. There are no adverse Alternative Minimum Tax (AMT) implications to using the Section 179.

• Fifty Percent Bonus Depreciation – For 2009, a small business can take a 50% bonus depreciation write-off in the year the asset is placed in service. Only new property qualifies. Bonus first-year depreciation automatically applies to qualified property, unless the taxpayer “elects out.” The election out applies to all assets in the same class, i.e., 3-, 5-, 7- or 10-year class of property for 2009.

There is no AMT depreciation adjustment associated with the 50% bonus depreciation. In addition, for property with a life of 10 years or less, the balance of the asset’s cost may be depreciated using the 200% declining balance method instead of the 150% declining balance with the normal AMT adjustment.

• Modified Accelerated Cost Recovery System (MACRS) – The third provision is the normal depreciation allowance over the useful life of the equipment. Generally, the useful lives are 3, 5, 7, or 10 years depending upon the type and use of the equipment. MACRS provides accelerated depreciation (front-loaded) using the 200% declining balance method.

The following illustrates the three basic write-off provisions for $60,000 of business equipment purchased in 2009 with a useful life of 5 years and shows the maximum and minimum amount available. 

	Sec. 179	50% Bonus	MACRS
Sec. 179 Deduction	<60,000>
50% Bonus Depreciation	0	<30,000>
MACRS Depreciation (20%)	0	<6,000>	<12,000>
Total First Year Write-Off	<60,000>	<36,000>	<12,000>

This office can help plan a strategy that maximizes the benefits of the write-off for 2009 and subsequent years. Please call for assistance.

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