Here’s how U.S. businesses can use the recent changes in the tax law to reach appropriate levels of security within their businesses. These clauses are temporary, with “sunset clauses”, so it is important to ACT NOW to ensure the best possible economic benefit. Be sure to consult with your tax advisor prior to purchases based upon any deduction.

Bonus Depreciation

Under the new law, capital purchases, such as security equipment, can be depreciated at 50% for the year placed in service. The section 168 bonus depreciation provision was originally enacted under the Job Creation and Worker Assistance Act of 2002. The new law both extends the date for purchasing property subject to the bonus depreciation to December 31, 2004 and increases the additional depreciation percentage from 30% to 50%. The old law, which is still applicable, allows for a 30% bonus depreciation deduction in the year of acquisition for property purchased before September 11, 2004 that is not eligible for the 50% bonus depreciation.

Eligible assets for section 168 must be placed in service and acquired before January 1, 2005. Property is considered an eligible asset for the increased bonus depreciation if a binding written contract to acquire the property is in effect prior to January 1, 2005. Conversely, if a company has a binding written contract dated before May 5, 2003, that property is not eligible for the 50% bonus depreciation. However, if the contract was not in effect at September 11, 2001, the company can still claim the 30% bonus depreciation on such property.

Section 179 Deduction

For companies that use the section 179 deduction schedule, there is also good news and it positively affects the purchase of security equipment. Previously, taxpayers could expense $25,000 of fixed assets each year, but that figure was decreased, dollar for dollar, when total assets placed in service during the year exceeded $200,000. For example, if the taxpayer purchased and placed in service $210,000 of assets during the year, they could immediately expense $15,000 (or $10,000 over the limit, resulting in $10,000 less the deductible amount). The section 179 deduction is then limited to the taxpayer’s taxable income. The new law increases the immediate deduction amount to $100,000 and increases the total asset limitation to $400,000.

Important Notes

1. The 50% bonus depreciation is calculated after the provision of section 179 but before normal depreciation is calculated. Therefore, in calculating the depreciation deduction for 2003, a taxpayer would be able to immediately expense the first $100,000 of eligible assets placed in service under section 179. They would then add to that 50% of the eligible cost of any remaining property placed in service after May 5, 2003. Finally, regular MACRS depreciation would be calculated on the remaining basis of the assets placed in service. The company claiming the bonus depreciation need not have taxable income to claim this deduction, nor is it limited by the amount of property it places in service in a particular year.
2. It is important to note that the definition of eligible property for sections 179 and 168 are different. Eligible section 179 property is tangible personal property (i.e. computer hardware, office equipment, certain automobiles, etc.) that is used for a business purpose in the United States. Eligible property does not include real property, software, or building improvements. Eligible property, for purposes of the section168 bonus depreciation, is any property that would be depreciated for 20 years or less under the IRS’s MACRS categories. This definition would include the personal property categories mentioned above as well as canned software and certain land and leasehold improvements. The definition does not encompass real property and internally developed software.
3. Form 4562 was adjusted in 2002 to reflect an additional line on which the 30% bonus depreciation was reported in that year. No guidance has yet been issued as to which forms and other means taxpayers will use to report the bonus depreciation. If you have any additional questions about the applicability of these provisions to your situation, please consult with your tax advisor.