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Section 179 Deduction, 50% Bonus Depreciation, & MACRS Depreciation Under the Small Business Jobs Act of 2010:
How to Calculate Sec. 179 & 50% Bonus Depreciation with Illustrative Examples
by William Brighenti, Certified Public Accountant, Certified QuickBooks ProAdvisor

Accountants CPA Hartford, LLC: William Brighenti, Certified Public AccountantThe Small Business Jobs Act of 2010 increased the Section 179 deduction and limits for the years 2010 and 2011 as well as extended the bonus depreciation deduction through 2010.  Prior to its enactment, Section 179 was limited to $250,000 for 2010 and only $25,000 for 2011.  Moreover, the total amount of qualifying Section 179 property acquired in 2010 and 2011 had been limited to $800,000 and $200,000, respectively, with a dollar-for-dollar phase-out of the Section 179 deduction amount required for total purchases exceeding these thresholds.  In addition, 50% bonus depreciation was not available for 2010.

Now, with the passage of the Small Business Jobs Act of 2010, as much as $500,000 may be expensed under Section 179 for the years 2010 and 2011, with a dollar-for-dollar phase-out of the deduction for total purchases of qualifying property exceeding $2,000,000 annually.  Plus taxpayers are eligible for the 50% bonus depreciation on business assets purchased in 2010.

On a number of occasions I have been asked how does one compute depreciation using all three available approaches on one’s tax returns since the amount of depreciation deduction recognized under one of the three approaches affects or is affected by the depreciation deduction taken under the other two.  Of course, the Internal Revenue Service does not allow three separately, independently calculated deductions under each of the three different tax provisions for expensing the costs of business assets:  that is, Section 179 and Section 168 regarding bonus and MACRS depreciation.  Unfortunately the Internal Revenue Service is never that generous, and the Internal Revenue Code is never that simple.  Rather, the Internal Revenue Service specifies a sequential order of applying each of these three tax provisions for computing the deductions for purchases of business assets.  Perhaps an example will illustrate the distinction.

Assume a business machine with a five-year life is purchased for $2,000,000.  Of course, the IRS will not allow you to deduct $500,000 under Section 179, $1,000,000 under the 50% bonus depreciation, and $400,000 under MACRS, for a total deduction of $1,900,000.  But, as the following calculations illustrate, as much as $1,400,000 may be deductible on this purchase, assuming the entire $500,000 Section 179 is available and elected:


Calculation
Deduction
Purchase Price
$ 2,000,000

Less:  Section 179
    (500,000)
$  (500,000)
Basis Available for Bonus Depreciation
$ 1,500,000

50% Bonus Depreciation
     750,000) (750,000)
Basis Available for MACRS
$   750,000

40% Double-Declining Balance Method (Half Year)     (150,000)     (150,000)
Residual Basis, 12/31/2010
$   600,000   
Total Deduction for 2010

$(1,400,000)

It is worth noting that without the allowance of the Section 179 deduction and the bonus depreciation, depreciable expense would have been limited to merely $400,000 for 2010.  Consequently, these special depreciation allowances increase deductions by $1,000,000 for 2010 in this example, saving as much as $350,000 in Federal income taxes for certain taxpayers.

Now assume that your purchases for the year exceed the limit of $2,000,000 allowed for the year under Section 179.  If such occurs, then the amount of Section 179 allowable for the year is reduced dollar-by-dollar by the amount in excess.  Assume you purchased $2,200,000 in qualifying business assets under Section 179.  The total allowable tax deduction would be calculated as follows:


Calculation
Deduction
Purchase Price
$ 2,200,000 

Phase-out Threshold
    2,000,000 
Phase-out Excess
$    200,000 

Section 179 Limit
    (500,000)
Allowable Section 179 Deduction
$  (300,000)  $  (300,000)
Basis Available for Bonus Depreciation
$ 1,900,000

50% Bonus Depreciation
    (950,000)
(950,000)
Basis Available for MACRS
$   950,000

40% Double-Declining Balance Method (Half Year) $  (190,000)
     (190,000)
Residual Basis, 12/31/2010 $  760,000
Total Deduction for 2010
$(1,440,000)

Although the $200,000 excess over the Section 179 threshold for 2010 reduces its deductible amount, in essence one-half of that amount—$100,000—is recovered through bonus depreciation, mitigating the loss from purchases over the allowable annual limit.  Without the allowance of the Section 179 deduction and the bonus depreciation, the depreciation deduction would only have been $500,000.  Again, there is a significant increase in deductions from their allowance, amounting to $940,000 in the example above.  Of course, when purchases exceed $2,500,000, there is no Section 179 deduction permitted.

From the above two illustrations, it should be apparent that the order of applying the Section 179, bonus depreciation, and MACRS depreciation calculations is critical in deriving the correct deduction for business asset purchases on your tax return.  First always deduct the allowable Section 179 deduction from the total purchases to provide the appropriate amount eligible for the 50% bonus depreciation.  Then after deducting both these Section 179 and 50% bonus depreciation amounts from the total purchases of qualifying business assets, MACRS can be calculated using the residual basis.

There are several Federal depreciation calculators available on the internet; however, always check to ensure their accuracy.  I have discovered some depreciation calculators on the web generating incorrect total deductions for Section 179, bonus depreciation, and MACRS depreciation because they have yet to have been updated for the most recent changes in the tax code.  Therefore, it is imperative to understand the methodology of computing the tax deductions of purchases of business assets.  If you have any questions on calculating the Section 179 deduction, bonus depreciation, and MACRS depreciation for your business, please contact us now by calling us at (860) 828-3269 or by following this link:  Accountants CPA Hartford, LLC.

This article is provided for informational purposes and is not intended to be construed as legal, accounting, or other professional advice.  For further information, please consult appropriate professional advice from your attorney and certified public accountant. 

Have a tax, a QuickBooks, or an accounting question?  Please feel free to submit it under "Comments" on our blog, Accounting, QuickBooks, and Taxes by William Brighenti, Certified Public Accountant, Accountants CPA Hartford, LLC.  For information and assistance on any tax, QuickBooks, or accounting issue, please visit our website:  Accountants CPA Hartford, LLC.

If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.  The above tax advice was written to support the promotion or marketing of the accounting practice of the publisher and any transaction described herein.  The taxpayer recipients of this offering memorandum should seek tax advice based on their particular circumstances from an independent tax advisor.

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