To help a struggling economy, Congress has encouraged business investment in capital equipment using two incentives.
Through 2011, new equipment – not used equipment recently purchased – qualified for a 100 percent bonus depreciation deduction. But for calendar year 2012, the first-year bonus percentage drops to 50 percent, and for 2013 there is no bonus percentage. The 100 percent incentive for 2011 required the asset to have been legally acquired and placed in service by Dec. 31, 2011.
The Internal Revenue Code Section 179 (first-year depreciation) deduction was $500,000 for tax years beginning in 2011. The tax year beginning in 2012 sees this deduction reduced to $139,000. The first-year incentive deduction applies to new and used assets. It’s claimed before applying the 50 percent bonus for 2012.
Example: A small-business owner purchases $339,000 of both new and used machinery and equipment during 2012. The owner can claim up to $139,000 of the Section 179 deduction and apply it to used items, leaving $200,000 of cost.
The 50 percent bonus is applied to another $100,000 deduction – assuming the remaining $200,000 is for new equipment eligible for the bonus. The final $100,000 is subject to the normal seven-year depreciation schedule.
In this example, the first-year depreciation deduction is $239,000 on total machinery and equipment cost of $339,000.
The bonus depreciation provision applies to new acquisitions of assets that have a 20-year or shorter depreciation period. If machinery and equipment are placed in service in 2012, bonus depreciation applies to 50 percent of the cost with the remaining 50 percent depreciated over the 20-year or shorter depreciation period, using a half-year convention for the first year.