Bonus Depreciation: Opportunity for Tax Savings Through 2011
The tax strategies offered by the Advisory Group at Net Lease Capital enhance the outcomes of property investments and sales. Among the tools employed in these strategies are applications of useful provisions of the tax code. This article deals with “bonus depreciation”, which allows property owners to take very accelerated depreciation expenses to offset income. Recent provisions about bonus depreciation offer opportunity through the end of 2011.
The American Recovery and Reinvestment Act, enacted in Feb, 2009, encouraged investment by allowing businesses to take depreciation expenses more rapidly than before, to offset income. By taking these additional expenses, businesses would be able to reduce their taxable income and save more in taxes, sooner. The additional depreciation expenses were called “bonus depreciation”. Since then, the Tax Relief Act of 2010 and the Small Business Jobs Act of 2010 have extended and increased the bonus depreciation available for filers in 2010 and 2011.
As the Tax Policy Center explains in its fact sheet, “Quick Facts: Bonus Depreciation and 100 Percent Expensing,” taxable income for a business is the amount of income it produces minus the expenses it incurs. The depreciation of assets needed to conduct business is one kind of deductible expense. Some assets depreciate entirely in a single year, but durable assets, like tractors or computers, depreciate over multiple years on a on a graduated schedule.
Bonus depreciation is added to the depreciation expense available from a year’s worth of an asset’s depreciation according to a standard depreciation schedule. Bonus depreciation is always applied in the first year a property is put into service. The amount of additional depreciation expense allowed with bonus depreciation has varied in different years. Under the American Recovery and Reinvestment Act in 2009, businesses could deduct an additional 50% of the property’s depreciable basis in the first year of ownership for qualified properties.
This amount of bonus depreciation allowable was increased under the Tax Relief Act of 2010 and under the Small Business Jobs Act of 2010. For properties with up to 20 years of depreciation period and subject to the Modified Accelerated Cost Recovery System of depreciation (MACRS), businesses can deduct 100% of a property’s depreciable basis during its first year of ownership. (Later, when an asset is sold, the total amount of depreciation taken is subject to recapture tax as ordinary income.)
For example, if a newly developed property is placed in service and acquired in October, 2011, any component of that property which can be depreciated under MACRS in a period of 20 years or less – perhaps the property’s parking lot – can be depreciated entirely in the first year, rather than in smaller, annual increments. The owner saves income tax on the depreciated value up front, and derives the benefit of putting that saved money to work, early on.
For a $20 million building, for instance, if $5 million of the property qualified for depreciation in 15 years, $5 million could be depreciated in the first year. Assuming a 40% combined income tax rate, that amounts to savings of $2 million in taxes up front – savings which might then be invested in other productive assets for added return.
The expenses from bonus depreciation may be applied against income from prior years to generate immediate tax savings.
According to Net Lease Capital Managing Director, Jim McCartney, bonus depreciation is a powerful tool for the property owner who has a productive use for capital in the immediate near-term.”
For more on bonus depreciation or to discuss how it may be applied in your tax planning this year, contact Jim McCartney at 603-546-2556, or at jmccartney@netleasecapital.com.
Contributed by Chris Campbell
Managing Director
Net Lease Capital Advisors
