Wisconsin Lawyer
Vol. 84, No. 2, February 2011
Business owners need to consider their overall strategy before jumping into the new depreciation rules. As an example, Angie, a construction contractor proprietor, purchased a new piece of equipment for $620,000, and placed it into service on June 1, 2011. Assume Angie uses the full section 179 depreciation allowance first, followed by bonus depreciation, and then uses normal accelerated depreciation for the remainder under Treasury Regulation section 1.168(k)-1(d)(2). The chart below shows the different amounts of depreciation under the 2009 rules and the new rules. (Note: This example assumes that Angie has enough income and enough basis to properly use the deductions.)
| Depreciation Method |
New Rules1 |
2009 Rules |
|---|
| Section 179 deduction |
$500,000 |
$250,000 |
| Bonus depreciation |
120,000 |
185,000 |
| Regular accelerated depreciation |
0 |
26,429 |
| Total depreciation expense |
$620,000 |
$461,429 |
In the simple example shown above, the change in the law creates a $158,571 change in allowable depreciation expense or about 34 percent more depreciation expense than under the 2009 rules. But, if Angie was already showing a tax loss, the $158,571 of accelerated depreciation might be better used in future years, such as after Dec. 31, 2012, when the maximum federal income tax rates are scheduled to rise to 39.9 percent, versus today’s 35 percent. Although carrying any losses forward might help address the timing issue, it does not help out the cash-flow issue if Angie is already short of cash in the current year.
1The I.R.C. § 179 expensing election is limited to $125,000 beginning Jan. 1, 2012, and returns to $25,000 after 2012. The I.R.C. § 168(k) bonus depreciation only applies to qualified property placed in service between Sept. 8, 2010, and Dec. 31, 2011.
