Need Some Deductions for 2011?

Don't overlook these!

Updated for 2011

Small Business Deductions: Depreciation

<< Previous

First-year Expensing Deduction Restrictions and Limitations (also referred to as the Section 179 deduction)

1) Business use must exceed 50%:

To claim first-year expensing for qualified property, business use must exceed 50% in the first year the property is placed in service.

2) Qualifying business equipment must be both purchased and placed in service in the year you take the deduction.

Example:

You purchased a computer in 2010 for personal use then converted it to business use in 2011. You may not deduct first-year expensing for that computer. However, you may claim regular MACRS depreciation.

3) The deduction is limited to tangible personal property purchased for business use, such as:

A car or truck acquired from nonrelated parties
Computer
Machinery
Office equipment
Off-the-shelf software

4) The maximum expensing deduction in 2011 is $500,000

5) Maximum deduction in 2011 for heavy trucks, vans, and SUVs (over 6,000 pounds):

$25,000 is the maximum first-year expensing deduction for trucks, vans, and SUVs, purchased after October 22, 2004, weight-rated at over 6,000 pounds gross vehicle weight (fully loaded) but not more than 14,000 pounds.

The $25,000 Section 179 limit does not apply to...

A vehicle designed to seat more than nine persons behind the driver’s seat.
A vehicle equipped with a cargo area (either open or enclosed by a cap) of at least six feet in interior length that is not readily accessible directly from the passenger compartment, or
A vehicle that has an integral enclosure fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

6) Maximum depreciation deduction in 2011 for cars and light duty trucks, vans and SUVs:

$3,060 is the annual ceiling for passenger cars
$3,260 is the annual ceiling for vans, trucks, and SUVs 6,000 pounds or less.

2011 100% Bonus depreciation:

If you elect to take the special depreciation allowance for qualified passenger automobiles placed in service in 2011, the limit is $11,060 ($3,060 plus $8,000).

See the 2011 depreciation tables for the depreciation ceilings on page 16 of Form 4562 instructions.

Note: Table 3 is for passenger cars and Table 4 if for light trucks, vans, and SUVs 6,000 pounds or less. Keep in mind, depreciation ceilings do not apply to SUVs weighing over 6,000 pounds..

7) Property traded in:

If you trade-in property for other property, the cost eligible for first-year expensing is limited to the cash you paid. The adjusted basis of the property traded is not eligible.

Example:

You purchase a computer for $1,500 and use it 100% for business. You pay $1,000 cash and are allowed $500 for your old computer. Your first-year expensing is limited to $1,000.

8) Taxable income limitation:

The first-year expensing deduction may not exceed the net taxable income from all businesses you actively conduct.

Note that even wages from a job is considered a "business" you actively conduct for the purpose of figuring your taxable income limitation..

For example, if you're a sole proprietor and your Schedule C net income is $30,000 and W-2 wages from a job that either you and/or your spouse earned and reported on line 7 of Form 1040 is $20,000, then $50,000 of income its taken into account when figuring the taxable income limitation for the Section 179 deduction.

You figure net income from active businesses without regard to the following items:

The first-year expensing deduction
The deduction for self-employment tax entered on Form 1040
Any net operating loss carryback or carryforward.

Net income from businesses you actively conduct may include:

Wages or salary you earn as an employee.
If you're married, you may also include your spouse's net taxable income.

Net loss from all actively conducted businesses:

If you have an overall net loss from all actively conducted businesses you may not claim an expensing deduction for that year.

Net taxable income less than cost of qualifying property:

If overall net taxable income is less than the cost of qualifying property, the first-year expensing deduction is limited to net taxable income.
However, the cost that exceeds overall net taxable income may be carried over to the next year and added to the annual expensing allowance for that year.

Example:

Your overall net taxable income in 2011 is $100,000. You purchased and placed in service qualified property costing $108,000.

Result:

Your maximum deduction for 2011 is $100,000 (equal to your overall net taxable income).
You carry over the remaining cost, $8,000 to the following year and add it to your first-year-expensing allowance for that year.

Your carryover to 2012 is barred if you did not claim the deduction on your return for the year the property was placed in service.
- For example, you must complete the expensing section of Form 4562 for 2011 in order to get a carryover to 2012.

10) Purchases exceeding $2,000,000 in tax year 2011:

The annual expensing limit of $500,000 for 2011 must be reduced dollar-for-dollar by qualifying purchases exceeding $2,000,000

Example:

In 2011 you spend $2,100,000 on qualified property. The maximum 2011 expensing deduction (Section 179 deduction) of $$500,000 must be reduced by $100,000.

Your maximum first-year expensing deduction for 2011 is $400,000 ($500,000 minus $100,000). But see Bonus depreciation, next.

100% Bonus Depreciation for New Business Placed in Service During 2011:

Although the Section 179 deduction (first-year expensing deduction) is limited to $500,000, bonus depreciation is not limited to any ceiling. In addition, there is no dollar-for-dollar reduction applicable to bonus depreciation, regardless of the amount spent on purchases of new depreciable business property.

Because of the 2011 100% bonus depreciation rate, it is unnecessary to claim the Section 179 deduction.

11) MACRS recapture:

If you later dispose of property you depreciated using MACRS, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the depreciation previously allowed or allowable for the includes any of the following deductions taken during the 2008 tax year.

Any section 179 expense deduction claimed on the property,
Any special depreciation allowance available for the property (unless you elected not to claim it),
Any deduction under section 179B for capital costs incurred in complying with Environmental Protection Agency sulfur regulations,
Any deduction under section 179C for certain qualified refinery property, and
Any deduction under section 179D for certain energy efficient commercial building property.

12) Recapture of Section 179 expense deduction on listed property:

If you used listed property more than 50% in a qualified business use in the year you placed the property in service and used it 50% or less in a later year, you may have to recapture in the later year part of the section 179 expense deduction. Use Form 4797 to figure the recapture amount.

13) Residential rental and nonresidential rental real property:

There is no recapture for residential rental and nonresidential real property, unless that property is qualified property for which you claimed a special depreciation allowance (discussed earlier). For more information on depreciation recapture, see Pub. 946.

Depreciation: First-Year Expensing Deduction Restrictions and Limitations-Continued

Next >>

Business Deductions

More Tax Topics

Quick Links

Hot Topics

Need Some Deductions for 2011?

Small Business Deductions: Depreciation

<< Previous

First-year Expensing Deduction Restrictions and Limitations (also referred to as the Section 179 deduction)

Next:

Related Links