Woodworking manufacturers have another incentive to help jumpstart economic recovery in 2011. A tax bill passed in the final days of the last Congressional session and signed into law by President Obama on December 17 provides for big bonuses for companies that invest in new machinery this year.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act has been described by a lobbyist for the woodworking industry as “a big deal.” A key provision of the act offers a 100 percent depreciation bonus for equipment investments in 2011. The bonus continues into 2012 but is reduced then to 50 percent.

Quick write-off 

That means that a company buying new machinery in 2011 will be able to write off the entire purchase price in the same year the machinery was bought rather than depreciating the cost over several years as is normally the case.

According to the White House, this provision alone could potentially generate more than $50 billion in additional investment in 2011, which would presumably fuel job creation.

The new law applies to qualified equipment placed in service after December 31, 2010, in taxable years ending after that date. The 100-percent first-year depreciation deduction applies to property placed in service by the taxpayer after September 8, 2010, in taxable years ending after such date.

Direct expensing 

In addition to the depreciation bonus, the new law improves direct expensing allowance provisions, but these provisions may not be as important because the depreciation bonus has no investment cap.

Under current law, the allowance and phase out threshold for the direct expensing provision are $500,000 and $2,000,000, respectively, for the taxable years beginning in 2010 and 2011. The new law permits taxpayers to use a direct expensing allowance in 2012 of $125,000. The $125,000 amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $500,000. The $125,000 and $500,000 amounts are indexed for inflation.

However, it is important to note that in 2013, the direct expensing allowance and cap revert to their original $25,000 and $200,000 levels -- without inflation indexing.

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