Enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (TRUIRJCA) is a big deal for the woodworking industry. With the inclusion of a 100 percent depreciation bonus for 2011, woodworking companies have a great incentive to invest in CNC routers, panel saws and other equipment that can help make them more efficient and competitive. There is also a 50 percent bonus for 2012. Requirements for the Depreciation Bonus
Rules similar to those in section 168(k)(2)(A)(ii) and (iii), which provide that qualified property does not include property acquired pursuant to a written binding contract that was in effect prior to January 1, 2008, apply for purposes of determining whether property is eligible for the temporary 100 percent additional first-year depreciation deduction. Thus under that provision, property acquired pursuant to a written binding contract entered into after December 31, 2007 is qualified property for purposes of the 100 percent additional first-year depreciation deduction assuming all other requirements of section 168(k)(2) are met.
The provision generally permits a corporation to increase the minimum tax credit limitation by the bonus depreciation amount with respect to certain property placed in service after December 31, 2010 and before January 1, 2013. A taxpayer does not compute a bonus depreciation amount under section 168(k)(4)(C) for any bonus depreciation allowable with respect to property placed in service during 2010.
For example, assume in its taxable year beginning October 1, 2010 and ending September 30, 2011, a cabinet company invests in a new automated finishing line with a total cost of $1 million of which $250,000 was placed in service before December 31, 2010. The corporation computes its bonus depreciation amount under section 168(k)(4)(C) taking into account only the bonus depreciation computed with respect to the $750,000 of property placed in service after December 31, 2010.
The new law applies with respect to round 2 extension property, which is defined as property that is eligible qualified property solely because it meets the requirements under the extension of the additional first-year depreciation deduction for certain property placed in service after December 31, 2010.
Under the new law, a taxpayer that has made an election to increase the research credit or minimum tax credit limitation for eligible qualified property for its first taxable year ending after March 31, 2008 or for extension property may choose not to make this election for round 2 extension property.
Further, the new law allows a taxpayer that has not made an election for eligible qualified property for its first taxable year ending after March 31, 2008 or for extension property, to make the election for round 2 extension property for its first taxable year ending after December 31, 2010, and for each subsequent year. In the case of a taxpayer electing to increase the research or minimum tax credit for eligible qualified property and extension property and the minimum tax credit for round 2 extension property a separate bonus depreciation amount, maximum amount, and maximum increase amount is computed and applied to each group of property.
The new law generally applies to property placed in service by the taxpayer after December 31, 2010, in taxable years ending after such date. The provision expanding the additional first-year depreciation deduction to 100 percent of the basis of qualified property applies to property placed in service by the taxpayer after September 8, 2010, in taxable years ending after such date.
In addition to the depreciation bonus, TRUIRJCA made some improves to the direct expensing allowance provision, Section 179. However, I would be surprised if Section 179 is used in 2011, as 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 million respectively, for the taxable years beginning in 2010 and 2011. TRUIRJCA 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. The big problem is in 2013, the direct expensing allowance and cap revert to their original $25,000 and $200,000 levels - without inflation indexing.
Editor's note: John S. Satagaj is a long-time Washington lawyer, specializing in small business, trade association and tax matters. He serves as legal counsel for the Wood Machinery Manufacturers of America (WMMA) and is also the first president of the Small Business Legislative Council (SBLC), a permanent, independent coalition of nearly 70 trade and professional associations that share a common commitment to the future of small business.
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