Small Business Deductions: Depreciation

UPDATE for 2011

100% Bonus Depreciation for 2011

For 2011 you may claim a 100% first-year bonus depreciation deduction. Because of the 100% bonus depreciation rate, claiming the Section 179 deduction is not necessary.

For example, if you purchased $600,000 worth of equipment during 2011 and placed it into service and don't claim the Section 179 deduction, the adjusted basis of the equipment would be $600,000 ($600,000 minus zero Section 179 deduction = $600,000).

Since the adjusted basis is $600,000 and since bonus depreciation is 100% if the adjusted basis, you get to deduction 100% of the $600,000 without having claimed any Section 179 deduction.

In addition, unlike the Section 179 deduction, which has a deduction limit of $500,000 for 2011, there is no deduction limit for bonus depreciation; you can claim 100% of the cost regardless of the amount.

Property Must Be New:

To claim bonus depreciation, the property must be purchased new and placed in service in the same year it is purchased. On the other hand, you can claim a Section 179 deduction for new or used property purchased and placed in service in the same year.

Computing Bonus Depreciation:

Multiply the adjusted basis of the property by 100%. You're not limited to the $500,00 deduction limit that applies to Section 179 either. This is why claiming a Section 179 deduction is not necessary.

When claiming a Section 179 deduction, the adjusted basis of the property is determined by subtracting the Section 179 deduction amount from the original cost of the property. You then multiply the adjusted basis by 100% to determine the bonus depreciation for 2011. If you did not claim Section 179, then, you would simply claim 100% of the original cost of the property as bonus depreciation; in effect, the original cost would be considered the adjusted basis since nothing was subtracted from it.

Example #1: You claim a Section 179 deduction and bonus depreciation

• During 2011, you place in service new equipment at a cost of $600,000

Result:

• You total deduction is $600,000, figured as follows:
  • You claim the maximum Section 179 deduction allowed: $500,000
  • You also claim $100,000 as bonus depreciation ($600,000 minus $500,000 x 100%).

Example #2: You only claim bonus depreciation

• During 2011, you place in service new equipment at a cost of $600,000
• You do not claim any Section 179 deduction

Result:

• Your deduction is still $600,000
• You claim 100% of the $600,000 as bonus depreciation for 2011

As you can see, you get the entire $600,000 deduction whether not you claim the Section 179 deduction.