The public discussion about the impending end of the Bush tax cuts is like an after-dinner argument over politics: it’s being conducted in loud voices in the living room and is dominated by individual and corporate tax rates and capital gains.
Down in a quiet corner of the basement, tucked under a table where no one is really looking, is an issue important to everyone who runs a small-to-medium-sized business: the impending end of bonus depreciation.
If bonus depreciation disappears as scheduled, in 2013 businesses will lose a significant tax deduction on purchases of new equipment, machinery, and other capital expenditures.
The bonus depreciation program was put in place as a recession-fighting tool to bolster a weak economy. The program defers, but doesn’t eliminate, taxes for these purchases. Businesses ultimately pay the same amount of tax, just later.
Bonus depreciation changes the date for when companies can deduct the cost of new machinery and equipment. As a result, many companies view bonus depreciation as type of interest-free loan (using their own money), valuable during a time when banks have tightened lending practices.
The Job Creation and Worker Assistance Act of 2002 initiated bonus depreciation when it passed in the aftermath of the Sept. 11, 2001 terrorist attack on the World Trade Center.
Other than from 2005 to 2007, bonus depreciation has generally been around since 2001, just at different depreciation levels. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 brought about bonus depreciation’s latest incarnation, enabling businesses to deduct in the first year the total amount of new – not used - machinery, equipment and other qualifying purchases.
As with any law or regulation, there are definitions and eligibility requirements. Here’s just one description from IRS.gov as to what is allowed under bonus depreciation: “An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services.”
Another way to look at it is that purchases of dump trucks; bulldozers; tractors; computer software; private aircraft – big-ticket items - are affected.
Under the 2010 law, bonus depreciation of 100 percent was allowed in 2011, 50 percent in 2012 (although this could still be increased to 100 percent). As of Jan. 1, 2013, that number descends to zero.
There are two consequences of a complete zeroing-out of bonus depreciation:
- Business that have the ability to buy what they need between now and Dec. 31 will, if they can, speed up their purchases
- After Jan. 1, businesses could radically scale back what they buy because their first-year taxes will shoot up
The loss of bonus depreciation has a compounding effect. Companies have already deducted purchases made recently; therefore, little or no depreciation remains to deduct during 2013. This will cause a significant increase in tax liabilities. Additionally, companies won’t be able to completely deduct purchases made in 2013. Many businesses will feel as if the interest free loan has been called in at a time they can least afford it.
Regardless of what you may hear about the chances, or lack thereof, for a bonus depreciation extension, counting on it runs great risks. What are your options if it goes away? What decisions will you have to make for the sake of your customers, employees and future?
Start planning now. Delay is not your ally.
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