Year-end capital investment could make more of a difference than usual this year. Two important tax provisions favorable to capital investments expire at the end of 2012. That means it can make a big difference in your tax bill whether you get those assets in place by the end of this year.
Bonus depreciation is scheduled to go away after this year. The tax law normally requires businesses to deduct the cost of capital expenditures -- equipment, software, etc. -- over a period of years. "Bonus" depreciation allows taxpayers to deduct some or all of those costs in the year the capital asset is placed in service. For 2012 taxpayers can deduct 50% of the cost of "new" assets (though not most buildings) in the first year; the remaining 50% of the cost is recovered over the asset's normal tax life.
Secition 179 is even more important to most entrepreneurs than bonus depreciation. Qualifying investments can be fully deducted under Section 179 in the year they are placed in service. Section 179 has two important advantages to Iowa taxpayers. First, it can be used on purchases of used equipment, unlike bonus depreciation. Second, Iowa recognizes Section 179, but not bonus depreciation, so it provides a state tax break that bonus depreciation doesn't.
Taxpayers can deduct the cost of assets under up to $125,000 for tax years beginning in 2012. That number is scheduled to decline to $25,000 in 2013.
Section 179 is subject to some important limits. The abiity to take the Section 179 deduction phases out dollar for dollar in 2012 as fixed asset purchases for the year exceed $500,000. Also, unlike with bonus depreciation, you cannot create a loss with a Section 179 deduction, so you can't use it to generate a loss carryback to recover prior-year taxes.
To claim either a Section 179 deduction or bonus depreciation for an asset, a calendar-year taxpayer has to have the asset "placed in service" by December 31. That doesn't mean ordered by year end, or sitting in a box on the loading dock when you close for New Years. It means hooked up and ready to run.
Year-end planning this year is even more fraught with uncertainty than usual. Top federal tax rates are scheduled to increase from 35% to 39.6% after this year -- and to 43.4% for "passive" investors in business. Depending on the outcome of the elections, that increase may or may not happen. If the tax increase happens, many taxpayers will be better off not taking bonus depreciation or 179; they may even want to delay placing assets in service.
It's unwise to buy an asset you don't really need just for the tax break. For assets you will need for your business anyway, it's best to have the flexibility to place the asset in service this year. Depending on politics and your business needs, you can decide whether you want to plug in that new asset, and qualify for bonus depreciation and Section 179, closer to year end. You can also wait until you file you return to decide whether to opt out of bonus depreciation and Section 179, in case you want to use the deductions in years with higher tax rates.
With so much uncertainty, it's more important than ever to consult your tax advisor on these decisions. So do that.