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Tax Incentives Give Capital Investment Boost in 2012

Capital investment in 2011 was given a huge boost when the “Lame Duck Session” of the 111th Congress enacted The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the most aggressive capital investment tax policy in recent memory. However, much of the power of these incentives was lost with the expiration of 100 percent Bonus Depreciation and a reduction in IRC Section 179 Expensing that occurred at the end of 2011. Notwithstanding these reduction, the remaining 50 percent Bonus Depreciation and Expensing capital investment tax incentives still provide a significant catalyst for investment, albeit not as robust as in 2011. Additionally, there is also the possibility that in 2012 Congress will reinstate 100 percent Bonus Depreciation along with extending other expired or expiring tax provisions.

These investment incentives reflect tax policy long advocated by NPES, and will be very helpful to printers who have a business need for capital purchases.

Before outlining the specific provisions of the current law, some fundamental concepts about IRC Section 168 Bonus Depreciation and IRC Section 179 Expensing need to be understood.

IRC Section 168 Bonus Depreciation v. IRC Section 179 Expensing

  • Both bonus depreciation and expensing apply to most tangible personal property with an applicable recovery period of 20 years or less, including computer software and qualified leasehold property that meets three criteria:
    1. Original use commenced after December 31, 2007.
    2. Taxpayer must purchase the property within the effective period of the bonus depreciation allowance.
    3. Taxpayer must place the property in service within the effective period of the bonus depreciation allowance.
  • IRC Section 168 bonus depreciation is available only for investments in new capital goods, whereas IRC Section 179 expensing may be used for investment in either new or used (but new to the purchaser) property.
  • Taxpayers may use expensing for purchases of used property, and bonus depreciation alone or in combination with expensing when buying new capital goods.
  • There is no limit to the amount of investment that may be eligible for bonus depreciation, whereas expensing is subject to annual dollar, investment and taxable income limits.
  • Both 50% and 100% bonus depreciation are mandatory unless the taxpayer affirmatively elects not to use the provisions.
  • Bonus depreciation must be taken entirely or elected out of, whereas a taxpayer may take any portion of expensing as an immediate deduction.
  • An election not to use bonus depreciation (whether it be 50% or 100%) applies to all bonus depreciation-eligible property for the class of property involved for the entire year.
  • A taxpayer may not split eligible property between 50% and 100% bonus depreciation, nor elect 50% bonus depreciation for property that qualifies for 100% bonus depreciation.
  • Bonus depreciation can create a Net Operating Loss (NOL) that can be carried back to prior years and result in an immediate tax refund.
  • Bonus depreciation applies for both regular tax and Alternative Minimum Tax purposes, but not for purposes of computing earnings and profits.
  • The method of computing depreciation when these various incentives work together is Section 179 expensing first, followed by Section 168 bonus depreciation, and then regular depreciation.

Following are key capital investment tax incentives for 2012 and beyond:

  • IRC Section 168(k) 50 percent bonus depreciation (enacted in 2009 as part of the American Recovery and Reinvestment Tax Act of 2009 and extended in The Small Business Jobs and Credit Act of 2010) continues for equipment placed-in-service before January 1, 2013.
    • Qualifying property continues to include depreciable tangible personal property purchased for use in the active conduct of a trade or business including, printing, publishing and converting equipment, as well as off-the-shelf computer software.

  • IRC Section 179 expensing (set at $500,000/ year with a phase-out starting at $2 million/year for tax years beginning in 2010 and 2011) continues through tax years beginning in 2012, but at the lower level of $125,000/year with a $500,000 phase-out.
    • ►The expensing cap and phase-out amounts will revert to $25,000 and $200,000 respectively in 2013.

      ►Unlike bonus depreciation, expensing applies to both new and used qualifying property, and is subject to annual dollar, investment and taxable income limits.

      The Annual Dollar Limit refers to the amount a taxpayer can claim under Section 179 each year. This amount is indexed for inflation.

      The Annual Investment Limit refers to the total amount of deductible property a taxpayer can put into service in a year before the Section 179 deduction starts to phase out. This amount is also indexed for inflation.

      The Annual Taxable Income Limit refers to the fact that a taxpayer’s annual deduction is limited to their aggregate taxable income from the active conduct of any trade or business.
      However, taxable income may include income from other sources in addition to the trade or business for which the property being expensed is purchased, including a spouse’s wages or other income, and income earned from other enterprises or work.

      Carryover Rules
      Any amounts disallowed by the Annual Taxable Income Limit are carried over to the next year and added to the cost of any eligible property placed-in-service in that year. The same maximum annual deduction, maximum annual investment and maximum annual taxable income rules apply to the next tax year as well.
      BUT CAUTION, investments in excess of the Annual Deduction Limit may not be carried forward, and can only be recovered through depreciation.

  • The refundable corporate AMT (Alternative Minimum Tax) credit continues.
    • ►Specifically, corporations will be able to utilize their AMT credits in lieu of bonus depreciation on property placed-in-service in 2011 and 2012.

      ►This election will allow a taxpayer to “monetize” its AMT credits generated before 2006, and will equal the lesser of 20 percent of the additional first-year bonus depreciation foregone, or 6 percent of the AMT credits generated before 2006 that were available for the first taxable year ending after March 31, 2008.

      ►However, in no event will the credits be allowed to exceed $30 million, and straight-line depreciation must be used for such property. There are also special rules for corporations that are part of controlled groups or partnerships.

It is important to note, however, that the affect of federal tax law varies from state to state.

NPES cautions that its tax calculator and this article are solely informational and do not constitute legal or other advice from NPES. In that regard, readers are advised to seek professional counsel from their own financial, accounting and legal advisors to apply these new incentives and other tax laws to their particular circumstances.

For more information contact NPES Government Affairs Director Mark J. Nuzzaco at phone: 703/264-7235 or e-mail: mnuzzaco@npes.org.


Acknowledgements:

Staying in place: Congress extends the Bush tax cuts, December 2010, Tax Policy Group of Deloitte Tax LLP in Washington, D.C., (Feb. 16, 2011).

The Section 179 Deduction, (Feb. 16, 2011)

Jonathan S. Levy, Bonus Depreciation Extended-Increased to 100% through 2011, Advocate Consulting Legal Group, PLLC, (Feb. 14, 2011).

Dennis Goginsky, Bonus Depreciation Includes Choices, Atlanta Business Chronicle, (Feb. 14, 2011)

Robert Willens, A Bonus for Companies Using Bonus Depreciation, CFO.com, (Feb. 14, 2011).

4-26-12