Oct 18

Written by: Stephen Stafford, J.D., LL.M.
10/18/2010 3:06 PM  RssIcon

In order to help small businesses quickly recover the cost of certain qualifying property - generally, machinery, equipment and certain software - small business taxpayers had, subject to Internal Revenue Code Section 179 limitations, been able to elect to write off the cost of some or all of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. The Small Business Jobs Act of 2010 encourages capital investments by allowing for faster cost recovery of business property, including certain qualified real property, and extends bonus first-year depreciation through 2010.

Section 179 Expensing Increased to $500,000, but only for 2010 and 2011

For tax years beginning in 2010 and 2011, the Act increases the Section 179 limit from $250,000 to $500,000, and the investment ceiling/phase-out threshold from $800,000 to $2,000,000. These expensing changes will create a windfall for those businesses that have already placed in service Section 179 eligible property in 2010 and which would not have been able to expense the full cost under prior law, but who are now able to under the Act.

These expensing changes may also have a windfall effect for small businesses in 2011. Under pre-Act law, the dollar limitation for tax years beginning after 2010 was set to be $25,000 and the phase-out threshold was set to be $200,000. The Act’s changes result in an increase of $475,000 to the limit and an increase of $1,800,000 to the phase-out threshold.

Considering the fact that the $25,000 dollar limit on expensing and the $200,000 phase-out threshold amount are both set to return for tax years beginning after 2011, the Act creates a huge incentive for small businesses to invest in capital in 2010 and 2011.

Section 179 Amended for 2010 and 2011 to Include Qualified Real Property

Under pre-Act law, qualifying property for purposes of the Code Section 179 expensing election was limited to depreciable tangible personal property purchased for use in an active conduct of a trade or business, including “off the shelf” computer software placed in service in tax years beginning before 2011.

The Act, however, also makes certain real property eligible for expensing. For property placed in service in any tax year beginning in 2010 or 2011, the ‘up to $500,000’ of property that can be expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).

Extension of 50% Bonus First-Year Depreciation

Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. The Act extends the first-year write-off of 50% of the cost to apply to qualifying property placed in service in 2010 (2011 for certain property).

To see the entire blog and read about some of the Act’s additional tax breaks for entrepreneurs and small businesses, click on the link below.

Tax Breaks for Entrepreneurs and Small Businesses in Small Business Jobs Act of 2010.pdf