Year-end is fast approaching. If you've been considering purchasing, financing, or leasing new business-related equipment, you can take advantage of Sec. 179 depreciation and bonus depreciation if you act before the end of the year. With bonus depreciation, businesses can deduct the full purchase price (within specified dollar limits) of equipment purchased or leased and put into service in 2011.
The Economic Stimulus Act of 2008 increased the Sec.179 deduction limit to $500,000 and increased the total amount of equipment that can be purchased to $2 million from the previous amount of $200,000. A one-time bonus depreciation was also added, which now allows businesses to write off 100% of the purchase price of new equipment or other assets during the year they were purchased, as opposed to taking depreciation through annual deductions over time.
Another big "bonus" identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, which reduces current income tax obligations. Personal property assets include a building's non-structural elements, exterior land improvements and indirect construction costs. Depreciation expense is accelerated and tax payments are decreased when an asset's life is shortened, which frees up cash – often a lot of cash. If you purchased real estate in 2011 you may be entitled to a large bonus depreciation deduction by property identifying 5-year and 15-year assets within your property.
When originally established, bonus depreciation allowed 30% of the purchase price to be deducted, then 50%, and now 100%. This is a temporary rule change, however, and limits are scheduled to revert in future years, so this is a great time to take advantage of these generous allowances while they are available.
Most business equipment, software, office furniture and even some vehicles can qualify for the Sec.179 deduction, including the following:
- equipment or machinery purchased for business use
- tangible personal property used in business
- business vehicles with a gross vehicle weight in excess of 6,000 pounds
- computer software
- office furniture and equipment
- property attached to your building that is not a structural component of the building (i.e.: a printing press, large manufacturing tools and equipment)
- partial business use (equipment purchased for business use and personal use — generally, your deduction will be based on the percentage of time you use the equipment for business purposes.)
Consider a scenario where you leased or financed some of the above equipment during 2011. Your business can deduct the full purchase price of that equipment in 2011, yet you've only made a few payments. Additionally, you have the benefit of putting the new equipment into use.
Taking advantage of Sec.179 depreciation and bonus depreciation in 2011 could have a major effect on your company's bottom line.
CAPITAL REVIEW GROUP does not advise on any personal income tax requirements or issues. Use of any information from this document or website referred to is for general information only, and does not represent personal tax advice, either express or implied. You are encouraged to seek professional tax advice for personal income tax questions and assistance.
Marky Moore, founder of Capital Review Group, Phoenix, AZ, is a Certified Sustainable Building Advisor and an Accredited Professional for the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED). She has a thorough understanding of green building practices and principles, as well as the LEED rating system. Capital Review Group assists businesses in strategizing for obtaining equipment or other liquid assets that will enhace their business, using tax deductions, improving cash flow and increasing profits. For more information, contact mailto:[email protected] directly at 602/741-7776
For Commercial HVAC Customers: Explore a Cost Segregation Analysis
Although creating an energy efficient facility saves money for business and building owners in the long run, the cost of getting there can be prohibitive. Retrofitting existing buildings with energy efficient lighting or HVAC improvements, or upgrades to the building envelope can save customers’ additional money on energy costs. But first, they have to find the funding for those improvements. The choices are, to find a way to provide the required capital or continue to face increased operating costs.
The ROI on new, energy-efficient systems may be longer, but the equipment will perform more reliably while providing better working conditions and lowering energy costs along the way. Most business owners will assume that funding for energy efficient upgrades has to come from dipping into their equity in the facility, or from an outside funding source, such as a bank loan.
Fortunately, there are alternative strategies that can be put into place to pay for energy efficiency projects by significantly lowering your tax burden. A cost segregation analysis identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, which reduces current income tax obligations. Personal property assets include a building’s non-structural elements, exterior land improvements and indirect construction costs. Depreciation expense is accelerated and tax payments are decreased when an asset’s life is shortened, which frees up cash for investment in energy efficiency projects.
The benefits of a cost segregation study are retroactive, including buildings that have been purchased, constructed, expanded or remodeled since 1987. This allows taxpayers to recapture previously unrecognized depreciation, which increases cash flow in the current year.
Another tax benefit that can be applied to energy efficient construction or improvements is found in section 179D of the Energy Policy Act of 2005. Sec.179D includes full and partial tax deductions for investments in energy efficient commercial buildings that are designed to increase the efficiency of energy-consuming functions. The deduction available is up to $.60 per sq.ft. for lighting, HVAC and building envelope, creating potential for $1.80 per sq.ft. if all three components qualify. These deductions are applicable to buildings that were either built or retrofitted after December 31, 2005. In order to qualify for the deduction, the taxpayer must receive a third party energy efficiency certification.
In addition, the issuance of Revenue Procedure 2011-14 will allow some taxpayers to claim the Sec. 179D deduction all the way back to January 1, 2006 without filing one single amended income tax return. Taxpayers who wish to take the deduction without amending any returns will file a Form 3115 (Application for Change in Accounting Method) and will get to take the entire “catch up” deduction on the return that is being filed. This means that a taxpayer could potentially claim deductions from 2006-2010 (or 2011) all on one return and significantly reduce their tax burden, if not eliminate it altogether, which goes a long way toward funding energy efficiency. Instead of looking to outside sources or reducing your valuable equity to fund energy efficiency, look to your own building for the answers. Putting the right strategy into place can result in surprisingly significant savings and painless way to pay for your project. ¬Marky Moore