Understand Section 179 and bonus depreciation provisions to realize the tax benefits when purchasing construction equipment.
To boost the weak economy, tax year 2011 saw unprecedented provisions in fixed asset expenses. Construction company owners benefitted from the provisions, which allowed them to take advantage of the tax cash flow savings to replace old or depleted equipment fleets.
But the provisions have been drastically reduced for the 2012 tax year and beyond (barring any legislative action to retroactively extend these provisions to 2011 levels).
The current tax law has two major provisions—Section 179 deduction and bonus depreciation—that allow taxpayers to expense qualifying capital expenses.
Since 2001, Section 179 limits have steadily increased, and bonus depreciation has been extended. Each of these provisions peaked in 2011 with a $500,000 expensing limit for Section 179 and a 100 percent bonus depreciation.
For tax year 2012, the 100 percent bonus depreciation option has decreased to 50 percent, and Section 179 expensing limits have decreased to $139,000. While these provisions accomplish the same result, they include various factors that require coordination to realize their full potential.
Section 179
Qualifying Section 179 assets include tangible personal property and other assets used in a trade or business. The assets can be new or used. The Section 179 provisions exclude real property and include a ceiling that will reduce the deduction after various spending limits have been reached.
The amount available to be expensed will be reduced dollar-for-dollar for the qualifying capital expenses that exceed the ceiling. For 2011, the ceiling was $2 million, and it is $560,000 for 2012.
The Section 179 expensing will not be available in 2012 if qualifying expenses exceed $699,000. And the Section 179 expense is limited to taxable income and cannot create a taxable loss for the taxpayer.
Section 179 limits will decrease again in tax year 2013. At that time, the expensing limit will fall to $25,000, and the ceiling will fall to $200,000 (amounts are subject to inflationary adjustments).
Often, many business owners and CFOs misunderstand how Section 179 can be applied to vehicles. A vehicle must have a gross vehicle weight (GVW) greater than 6,000 pounds to be eligible for Section 179 expensing. Then, taxpayers must comply with a list of other restrictive measures to determine the amount of the vehicle purchase price that can be expensed under Section 179.
The most often overlooked rule is the Sports Utility Vehicle (SUV) rule. The Section 179 expense for an SUV is limited to $25,000. One provision often throws many pickup trucks into the SUV category—the provision says the cargo area must be at least 6 feet in interior length. That provision alone will capture many of the half-ton extended cab and four-door pickups on the market today that otherwise meet the 6,000-pound GVW test.
Vehicles not typically used for personal purposes qualify for the full Section 179 deduction.
Bonus Depreciation
Qualified property eligible for bonus depreciation includes tangible property with a typical recovery period of 20 years or less. This generally includes almost all heavy equipment, rolling stock, computer software and certain qualified leasehold improvements.
The original use requirement must be met to be eligible for bonus depreciation, which means the asset must be new.
Unlike Section 179, bonus depreciation does not have a taxable income limitation. Bonus depreciation can be taken in excess of taxable income to create a net operating loss, which potentially can be carried back to recoup previous taxes paid or carried forward to offset future taxable income.
Coordinate the Provisions
While Section 179 and bonus depreciation provisions have been reduced for 2012, they should still be considered beneficial tools.
Any contractor purchasing equipment in 2012 should coordinate the Section 179 deduction and bonus depreciation to maximize the available tax benefit. This does not happen automatically—business owners must forecast their needs and proactively plan the timing and level of their purchases. Consult your tax adviser to determine the best path for your business.
