Can Bonus Depreciation Penalize Your Company?
A 100% write-off sounds like a no-brainer. But bonus depreciation is not always the right choice.
Over the past decade, Congress has made several attempts to boost the U.S. economy by tinkering with the tax code. In addition to cuts on individual taxpayer rates and payroll taxes, businesses have been allowed to claim additional first-year depreciation (so-called "bonus depreciation”) on qualifying fixed assets.
Bonus depreciation was first implemented in 2001 with a 30% rate. Congress upped the ante to 50% in 2008 with passage of the Economic Stimulus Act. Since then, the bonus depreciation has been renewed three more times. To further induce businesses to invest, the bonus depreciation rate was raised to 100% for qualifying property placed in service between September 8, 2010, and December 31, 2011 (or through December 31, 2012, for certain aircraft and longer-production-period property).
Many business owners have jumped at the opportunity to invest in their businesses and quickly write off their expenses. "Even when the maximum deduction was only 50%, bonus depreciation was still a marvelous benefit," says CPA Nancy Faussett. "In most cases, it’s certainly better than taking five, seven, or in some cases as long as 39 years to write off an expense."
That said, in some instances, Faussett says companies may be better off opting out of bonus depreciation. For example, forgoing bonus depreciation may be preferable to letting your company’s net operating loss (NOL) carryforwards expire. "You can eventually depreciate the cost of qualifying fixed assets, so it’s really a matter of when, not if, you will earn this benefit. However, an NOL carryforward can be permanently lost," says Faussett.
Other reasons for forgoing bonus depreciation include situations when a company wants to increase the credit limitation on the Section 53(c) Alternative Minimum Tax credit and, possibly, on the Section 38(c) General Business Credit for research expenditures. Known as a Section 168(k)(4) election, this option requires companies to use a straight-line depreciation method for qualifying assets.
Making the Call
Determining whether it makes sense to opt out of bonus depreciation requires complex, side-by-side comparisons. These calculations are subject to errors and noncompliance, as staff members may not be up to date on the rules that govern fixed asset depreciation for both financial and tax reporting. Organizations that rely on manual processes and spreadsheets may be particularly susceptible to errors.
"Even the tax preparation programs that many professionals rely on don’t deal in all of the many facets of depreciation," says Faussett. "For that, you really need specialized fixed assets management software that supplements your tax preparation program."
Learn More About Bonus Depreciation
To learn more about the many complexities of bonus depreciation, visit our Resource Center page on Bonus Depreciation and Other Tax Legislation Updates »
