Select 2011 Tax Provisions - Expense Related

Section 179 Expense Deduction

Rather than capitalizing and depreciating the cost of property purchased for use in a business, the cost may be immediately deducted as a Section 179 expense. The deduction applies to most tangible personal business property placed in service during the tax year, including computers, office furniture, vehicles, and machinery. The deduction also is available in 2011 for the cost of certain real property: qualified restaurant property, leasehold improvement property and retail improvement property.

For 2011, business owners can use this deduction to write off up to $500,000 of the cost of business property, regardless of whether the purchase was made with cash or credit. The deduction is reduced by every dollar spent more than $2 million. Therefore, if a company spends $2.5 million or more on eligible property, its Section 179 expense deduction will be zero. The Section 179 expense deduction cannot be greater than the business’s taxable income, although any unused depreciation can be carried forward, and the deduction does not apply to inherited property or property initially purchased for personal use, even if the property is later changed to business use.

The $500,000 and $2 million limits will, in 2012, return to prior thresholds of $125,000 and $500,000, adjusted for inflation. The IRS just released these inflation adjusted numbers. They are $139,000 and $560,000.

Benefits: It provides immediate tax relief on newly purchased equipment, benefits cash flow and promotes investment by small businesses.

Bonus Depreciation

If the cost of business property cannot be immediately deducted as a Section 179 expense, the cost may be depreciated, allowing deductions over several years. For property placed in service before 2013, a special bonus depreciation allowance grants a larger deduction in the first year, with any remaining cost subject to regular depreciation rules in later years.

Bonus depreciation allows business owners to deduct the entire cost of the property placed in service in 2011, and half of the cost of property placed in service in 2012. The allowance generally applies to tangible personal property with a recovery period of 20 years or fewer, certain leasehold improvements, office equipment and purchased computer software, but only if the property is new, not used.

Deciding how best to maximize the tax benefits between bonus depreciation and section 179 depreciation is a question itself with variables that will depend on individual business circumstances.

Benefits: It provides immediate tax relief, improves cash flow and provides additional capital that small-business owners can use to reinvest in the business.

Start-Up and Organizational Expenses

Small business owners typically incur a wide range of costs in the launch of their business. These start-up costs include expenses incurred when investigating whether to start or buy a business and which business to start or buy. Costs range from market analysis and feasibility studies to advertising, consultant fees, attorney fees and accountant fees. The tax law allows business owners to deduct some of these costs in the year the business starts, and others must be deducted over the course of future years.

In 2011, a taxpayer may deduct up to $5,000 of start-up expenses incurred during the tax year, decreased from $10,000 in 2010. The balance must be amortized over 180 months, beginning in the month that the business was launched. However, the deduction phases out dollar-for-dollar in 2011 if costs are greater than $50,000, with no immediate deduction available when start-up costs are greater than $60,000. In that case, all costs must be amortized over 180 months.

Also, certain organizational costs incurred in the setup of a C or S corporation or a partnership can be deducted under the same rules for business start-up costs. Organizational costs include legal and accounting fees relating to the creation of the entity.

Benefits: It promotes entrepreneurship and makes additional capital available to business owners that can be used for other purposes.