With the large increase of Section 179 deduction for 2010 and 2011 to $500,000 and 50% bonus depreciation on new assets in 2010 and possibly 100% in 2011, it is now even more important for your tax planning to coordinate these two deductions.
Here are the important rules to remember:
- Section 179 deduction is available on all new and used machinery (including single purpose ag structures such as a hog confinement facility),
- Bonus depreciation is only available on NEW purchases with a life of 20 years or less (includes almost all new ag buildings),
- Section 179 is taken first, bonus depreciation second, and then depreciation third,
- Section 179 is based upon when your taxable year starts and bonus depreciation is based upon when the asset is placed in service (if calendar year, then no difference).
Therefore, here are the general rules that you want to follow:
- First, take Section 179 deduction on all of your used equipment.
- Second, take full Section 179 deduction on all assets with the longest life. For example, if you have $100,000 of ten year property and $600,000 of 7 year property, take Section 179 on $100,000 of 10 year and $400,000 of 7 year property.
- Third, take your bonus depreciation on all of your NEW assets that qualify.
- Fourth, take normal depreciation on the remaining value.
If you are placing a large amount of equipment in service in the last quarter of the year, this may make you subject to mid-quarter depreciation which might limit your deduction for the year. If this might apply, you may want to time your Section 179 deduction on your late in the year assets to maximize the overall depreciation expense for the year.