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Bonus Depreciation and Increased Section 179 Deduction under the American Recovery and Reinvestment Act

The American Recovery and Reinvestment Act (ARRA), enacted in February 2009, extended the bonus depreciation and increased the section 179 deduction. For many businesses, these two provisions are only available this year and, as a result, they only have a few months to take action and save on their taxes. Here is a quick rundown of these provisions.

Many small businesses that invest in new property and equipment will be able to write off most or all of these purchases on their 2009 returns. The new law extends through 2009 the special 50 percent depreciation allowance, also known as bonus depreciation, and increased limits on the section 179 deduction, named for the relevant section of the Internal Revenue Code. Normally, businesses recover these capital investments through annual depreciation deductions spread over several years. Both of these provisions encourage these investments by enabling businesses to write them off more quickly.

The section 179 deduction enables small businesses to deduct up to $250,000 of the cost of machinery, equipment, vehicles, furniture and other qualifying property placed in service during 2009 ($285,000 for qualifying enterprise zone property and qualifying renewal community property). This limit is reduced by the amount by which the cost of section 179 property placed in service in the tax year exceeds $800,000. Without the new law, the limit would have dropped to $133,000. The existing $25,000 limit still applies to sport utility vehicles. A special phase-out provision effectively targets the section 179 deduction to small businesses and generally eliminates it for most larger businesses.

Qualified property must also meet all of the following tests.

You must have acquired qualified property after December 31, 2008, and before January 1, 2010. Qualified property must be placed in service before January 1, 2010

*** Note: References/Related Links – Article is reprinted from www.irs.gov and is intended as general information only. Please contact your tax professional to see if your business qualifies.