Posts Tagged ‘Depreciation’

IRS issues 2013 vehicle depreciation limits

Tuesday, February 26th, 2013 by Joe Kristan

The IRS has issued the maximum annual depreciation tables for cars placed in service in 2013 (Rev. Proc. 2013-21):



These are the Section 280F limits on so-called “luxury” cars.  They affect cars purchased for as little as $15,000.  Based on a search of Des Moines area cars, KIA is now a luxury brand.



IRS issues 2012 vehicle depreciation limits

IRS announces 2011 vehicle depreciation limits without settling “year 2″ problem in 100% bonus years.

IRS release solves ‘second year zero’ problem for auto depreciation


It’s not an apartment building, it’s a machine!

Wednesday, March 14th, 2012 by Joe Kristan

Most business fixed assets are depreciated over five or seven year lives. The cost of buildings, in contrast, has to be recovered over much longer lives — 27.5 for residential property and 39 years for other business buildings. An entire “cost segregation study” industry thrives by identifying items to carve out of buildings as shorter-lived assets.
An apartment building, or a finely-crafted machine?
Cost segregation studies are most effective in a factory building, where special wiring, concrete pads built to accommodate heavy machinery, lighting and so on can qualify for shorter lives. There is less opportunity for savings in apartment buildings, but that didn’t keep one partnership that showed up in Tax Court this week from giving it the old college try. Amerisouth XXXII, Ltd. threw in everything — including the kitchen sink — as shorter-lived property to maximize depreciation deductions. Judge Holmes sets the stage in his distinct style:

The Commissioner argues that with minor exceptions the apartment complex is one asset that AmeriSouth must depreciate over 27.5 years. AmeriSouth argues that, whatever the apartment complex may look like to an untrained observer, to a tax adept it is not a single asset but a collection of more than 1,000 components depreciable over much shorter periods. It is usually the case that a shorter depreciation period benefits taxpayers. It would certainly benefit AmeriSouth by generating hundreds of thousands of dollars’ worth of accelerated depreciation deductions. We are tempted to say this is why AmeriSouth throws in everything but the kitchen sink to support its argument — except it actually throws in a few hundred kitchen sinks, urging us to classify them as “special plumbing,” depreciable over a much shorter period than apartment buildings.

Judge Holmes considers the sinks:

AmeriSouth concentrates most of its persuasive efforts on the permanence of the sinks. AmeriSouth argues that the sinks are easy to remove — disconnect the sink from the water lines and remove approximately four screws or clamps — and uses the 2003 apartment renovations as an example.
But section 1.48-1(e)(2), Income Tax Regs., specifically lists sinks as structural components (“‘structural components’ includes * * * plumbing fixtures, such as sinks and bathtubs”). And while AmeriSouth tags this type of plumbing with the epithet “special”, providing water for the kitchen is hardly unusual in the sense of Scott and later cases, and AmeriSouth fails to give any other evidence that it periodically replaced or even planned to replace sinks after the 2003 renovation. So we find the sinks are also structural components of the buildings and not depreciable apart from them.

This reminds me of the “sledgehammer theory” used back in the old investment tax credit days — in fact, cost segregation studies are pretty much the old ITC studies under a different name. The theory was that if it could be moved with the help of a sledgehammer, it was “movable,” rather than part of the building, and could qualify for the credit. It wasn’t a particularly successful theory.
In this case, many other items – pipes, drain lines, wiring, and electric panels, for example, were claimed to be five-year property, unsuccessfully. A few items — garbage disposals, special plugs for refrigerators, and cable, phone and data outlets — did qualify for shorter lives.
The Moral: You should ponder what you are buying if you buy real property; there may be more depreciation available than meets the eye. But don’t throw in the kitchen sink.
Anthony Nitti has more.
Cite: AmeriSouth XXXII Ltd, T.C. Memo 2012-67


IRS issues 2012 vehicle depreciation limits

Monday, March 5th, 2012 by Joe Kristan

The IRS has updated the “luxury car” limits for vehicle depreciation for 2012 (Rev. Proc. 2012-23). There are two sets of limits: one for cars using bonus depreciation (only new cars qualify for that) and another for non-bonus depreciation. The tables:
Click chart to enlarge says that a Kia “Soul” base model is listed at $15,994 in the Des Moines area, making it the cheapest “luxury” vehicle available.
So live it up!
IRS announces 2011 vehicle depreciation limits without settling “year 2” problem in 100% bonus years.
IRS release solves ‘second year zero’ problem for auto depreciation


IRS announces 2011 vehicle depreciation limits without settling “year 2” problem in 100% bonus years.

Wednesday, March 2nd, 2011 by Joe Kristan

The IRS yesterday issued (Rev. Proc. 2011-21) the maximum vehicle depreciation limits under the so-called “luxury auto” rules of Section 280F. The guidance pointedly leaves open the treatment of vehicles eligible for 100% bonus depreciation in years 2-6 of their depreciation life:

The Service intends to issue additional guidance addressing the interaction between the 100 percent additional first year depreciation deduction and


Does 100% bonus depreciation set up car buyers for a second-year surprise?

Friday, February 4th, 2011 by Joe Kristan

The 100% bonus depreciation enacted for new assets purchased after September 8 of last year is a sweet deal. You can fully deduct the cost of qualifying assets in they year they go into service, regardless of how many you buy or whether it generates a loss.
It never was a completely sweet deal for buyers of business autos. Section 280F, the “luxury car” rule, limits depreciation. For cars put in service in 2010, the first year deduction is limited to $11,060 – $3,060 plus an extra $8,000 for bonus depreciation. The limit for year two would normally be $4,900 for the second year, $2,950 in year 3, and $1,775 annually afterward until the car is fully depreciated.
But for “luxury autos” purchased after September 8, 2010, the depreciation allowed for years 2 through 6 might be… zero.

Flickr image by David McKelvey under Creative Commons license. At $15,353, the Yaris is subject to the Sec. 280F depreciation limits.

The Sec. 280F limits were written to restrict the depreciation otherwise allowable for automobiles under the normal Sec. 168 depreciation rules. One argument holds that when 100% bonus depreciation applies, the depreciation is only allowable in Year 1, unless you elect out of bonus depreciation for all assets in that class. That means the depreciation for the remaining five years of the auto period is the lesser of the Sec. 280F limits or the amounts that would otherwise apply under Sec. 168 — in the case of bonus depreciation, that means zero. Then in year seven depreciation would again be allowed under a Sec. 280F catch-up rule.
Is this what Congress had in mind? Certainly not. But the IRS is seriously considering embracing this interpretation; I spent a half hour yesterday listening to an IRS technician explain why yesterday. While the technician agreed that the result is unintended and perverse, s/he thinks the IRS may be stuck with it.
I think that an IRS that can invent a massive preparer regulation regime with the flimsiest justification and no specific legislative mandate should be able to come up with a way to depreciate cars that isn’t insane, but that’s just me. We may learn how the IRS will decide when they issue the annual inflation update for the Sec. 280F limits; that was about February 15 last year.
Is there any way to deal with this on 2010 returns?
Even if the no-second-year-depreciation rule applies, you would probably not want to elect out of bonus depreciation. You would have to make that election to all “five year property,” including passenger autos. You would lose $8,000 of your first-year depreciation, which you wouldn’t make up until the third subsequent year. If you would sell your car by then anyway, you would gain nothing.
It’s not clear to me whether you could take a Sec. 179 deduction for the $11,060 limit and elect out of bonus depreciation for the rest. If you could, you would get the full Sec. 280F depreciation for years 2 through 6, but that only works for “qualified” property under the bonus depreciation rules; I’m not sure you have “qualified” property under the bonus depreciation rules if you elect out of bonus depreciation.
The IRS could solve this by ruling that Sec. 280F operates in conjunction with Sec. 168 to allow depreciation in years 2-6, but they might not be so inclined. It might take a technical correction to fix this, and we all know how much we can count on Congress to clean up its messes.
If you think this potential IRS interpretation is silly, you should contact IRS people you know, and your local Congresscritters, to share your views.


Top ten year-end tip #9: get that asset placed in service

Wednesday, December 22nd, 2010 by Joe Kristan

With a $500,000 limit to the Section 179 deduction and 100% bonus depreciation available for fixed assets purchased after September 8, many business taxpayers are counting on deductions for new equipment to reduce their 2010 tax bills. They need to remember that it’s not enough to buy the equipment by year-end to deduct it; it needs to be “placed in service.”
What does that mean? The IRS says “property is placed in service in the taxable year in which the property is placed in a condition or state of readiness and availability for a specifically assigned function.” That doesn’t mean in a crate on the loading dock awaiting assembly. It means on the shop floor, ready to rumble, as of the end of the year.
So if you are counting on writing off that new piece of equipment this year, you need to do more than have it ordered by December 31. Get it up and running.
Related: ‘Bought’ isn’t the same as ‘placed in service’
This is the second installment of our countdown of year-end tax tips for 2010. Collect them all!


Section 179 or bonus depreciation?

Monday, December 13th, 2010 by Joe Kristan

Paul Neiffer has posted an excellent summary of how to think about choosing between Section 179 deductions and bonus depreciation:

Here are the important rules to remember:
* Section 179 deduction is available on all new and used machinery (including single purpose ag structures such as a hog confinement facility),
* Bonus depreciation is only available on NEW purchases with a life of 20 years or less (includes almost all new ag buildings),
* Section 179 is taken first, bonus depreciation second, and then depreciation third,
* Section 179 is based upon when your taxable year starts and bonus depreciation is based upon when the asset is placed in service (if calendar year, then no difference).
Therefore, here are the general rules that you want to follow:
1. First, take Section 179 deduction on all of your used equipment.
2. Second, take full Section 179 deduction on all assets with the longest life. For example, if you have $100,000 of ten year property and $600,000 of 7 year property, take Section 179 on $100,000 of 10 year and $400,000 of 7 year property.
3. Third, take your bonus depreciation on all of your NEW assets that qualify.
4. Fourth, take normal depreciation on the remaining value.

This is complicated by the new tax bill, which will allow, in its current form, 100% bonus depreciation for qualifying assets placed in service starting September 9 of this year.
If you are hoping to generate a net operating loss to get a carryback refund, you will want to take the bonus depreciation rather than Section 179. You can generate a loss with bonus depreciation, but normally not with Section 179.


Will bonus depreciation join the “extender” parade?

Tuesday, June 22nd, 2010 by Joe Kristan

Bonus depreciation — the ability to deduct 50% of the cost of a capital asset in the year of purchase, rather than depreciating it over a period of years — was enacted in 2008 as a temporary anti-recession measure. With dozens of “temporary” measures routinely re-enacted one year at a time, temporary isn’t what it used to be. Now senior senate tax writers are looking to extend bonus depreciation, too. Tax Analysts reports ($link):

Leaders of the Senate Finance Committee on June 21 introduced a bill to extend through 2010 the 50 percent bonus depreciation rate under section 168, while pledging to continue work on a separate small-business package.
In a prepared floor statement, Finance Committee Chair Max Baucus, D-Mont., characterized S. 3513, the Bonus Depreciation Extension to Create Job Act, as another tool to help small businesses.

The bonus depreciation rules of 2008 and 2009 apply to new property, but not to used property.
The problem with bonus depreciation is that it really is designed get businesses to hurry up their fixed asset purchases — stealing business activity from subsequent years. When you keep extending it, it loses its punch. It becomes an expectation, and people are less inclined to hurry up and buy when they think the break will continue into next year. Also, there are only so many fixed asset purchases to accelerate.
Bonus depreciation is also a little compliance nightmare. Most states don’t allow it, so businesses have to maintain separate depreciation schedules state-by-state for bonus assets.
If bonus depreciation is a great idea, it should be permanently added to the tax law — as should all of the “temporary” provisions that Congress keeps extending. If it’s extended more than once, it’s hard to believe it’s really temporary, and Congressional budgeteers should be forced to recognize that.
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Yaris, the new luxury nameplate! IRS issues ‘luxury’ auto depreciation limits for 2010.

Tuesday, February 16th, 2010 by Joe Kristan

The IRS has issued the 2010 auto depreciation limits under the Section 280F “luxury auto” rules (Rev. Proc. 2010-18). For passenger autos, the limits are:

Year 1…………… $3,060
Year 2…………… $4,900
Year 3…………….$2,950
Year 4 and after: $1,775

Luxury is so affordable! These rules limit depreciation starting at a cost of $15,300. The lowest-price “luxury” vehicle I can find in the Des Moines area on is a Toyota Yaris for $15,353. A Yaris looks like this:
Flickr image by David McKelvey under Creative Commons license
So buy now and impress your friends!
For trucks and vans, the depreciation limits are:

Year 1…………… $3,160
Year 2…………… $5,100
Year 3…………….$3,050
Year 4 and after: $1,875

Related: Drive away in luxury for $14,800
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Will Iowa re-couple with federal deductions?

Monday, January 25th, 2010 by Joe Kristan

The article says the issue of linking Iowa’s income tax rules to the latest federal legislation is “complicated,” but it’s really pretty simple:


The Mid-Quarter trap

Tuesday, December 8th, 2009 by Joe Kristan

While year-end asset purchases can be a great way to reduce taxes, sometimes they can backfire.
The tax law normally computes depreciation for fixed assets (other than buildings) as if they were placed in service at the mid-point of the tax year. But if more than 40% of fixed assets are placed in service in the last three months of the tax year, the assets are all treated as placed in service in the middle of the quarter in which they were purchased.
Say Joe, Inc., a calendar-year taxpayer, bought $2.4 million of new computers in July 2009 and 1,599,000 in October 2009. His depreciation for these assets for the year would be $2,399,400: $1,999,500 in “bonus” depreciation and $399,900 in regular depreciation.
But now Joe buys and installs another $2,000 computer in December. Suddenly his purchases in the last 3 months of the year are 40.0149% of fixed asset purchases for the year, and the mid-quarter convention applies. Joe’s depreciation is now $2,230,525 for his 2009 additions:
– $2,000,500 in bonus depreciation
– $180,000 non-bonus depreciation for property placed in service in the third quarter, and
– $ 50,025 non-bonus depreciation for property placed in service in the fourth quarter.
The $2,000 December addition reduced depreciation expense by $168,875 for the year.
The moral: be careful in your year-end fixed asset purchases. Sometimes a little more assets can mean a lot less deductions.
Follow all of the Tax Update’s 2009 year-end planning tips!
Photo Credit: Image courtesy Redjar’s Flickr Photostream,

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Fixed assets and year-end planning

Monday, December 7th, 2009 by Joe Kristan

For many businesses, a new piece of equipment can be more just a good investment; it is often the easiest way to knock down an income tax liability. Changes in the tax rules that take effect after this year make fixed-asset planning especially important this year.
20091207-3.jpgBonus Depreciation: “Stimulus” legislation allows taxpayers who buy new property to get “bonus” depreciation equal to half of the cost of the property in the year it is placed in service, with the balance depreciated over the regular life of the property. For five-year property, this lets taxpayers recover 60% of the cost in the property’s initial year. For most property (aircraft is a limited exception), this rule expires for property placed in service after December 31.
Section 179 allows taxpayers to deduct currently property that would otherwise be capitalized and depreciated. Under the “stimulus” legislation, taxpayers can elect Section 179 treatment for up to $250,000 of property for year. Unless Congress acts — which isn’t imminent — this number goes down to $134,000 in 2010.
These provisions give taxpayers some flexibility to manage their 2010 taxable income, but they need to keep some things in mind:
– Bonus depreciation only applies to new property; Section 179 applies to both new and used equipment.
– Bonus depreciation can create or increase a net operation loss, enabling taxpayers to recover taxes paid in prior years; Section 179 is limited to active business income.
– While Section 179 starts to phase out dollar-for-dollar as property placed in service in the year exceeds $800,000, there is no such limit for bonus depreciation property additions.
– Neither Section 179 nor bonus depreciation are allowed for buildings.
– “Placed in service” isn’t the same as “bought” or “ordered.” It’s probably not enough to have the equipment sitting in shipping containers on your loading dock at year-end. It needs to be put together and ready to go.
– Iowa does not recognize bonus depreciation or the $250,000 Section 179 limits; the Iowa Section 179 limit for 2009 is $133,000.
Remeber that there is a potential trap for some taxpayers who rush property into service before year-end: the “mid-quarter convention” rules. We’ll disuss them tomorrow.
This is part of the Tax Update’s series of 2009 year-end tax tips. Collect them all!
Flickr image by infraredhorsebite,

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‘Bought’ isn’t the same as ‘placed in service’

Tuesday, November 24th, 2009 by Joe Kristan

Deductions for fixed assets — depreciation and Section 179 deductions — don’t necessarily start when you buy an asset. They are only available when the asset is “placed in service.” This can be a weapon for the IRS to delay deductions for assets that may be on the premises, but haven’t been put into operating shape.
A taxpayer yesterday showed the IRS that trick can work both ways. Courtney Brown was an electrical engineer with a specialty in recording equipment and dreams of going into business. He bought some equipment and tinkered with it for months. Finally he felt it was working the way he wanted in 2004, so he quit his day job and opened his own recording studio. He claimed a Section 179 deduction — the deduction that enables taxpayers to write off currently equipment costs that otherwise can only be recovered over a period of years through depreciation — of $22,832 for his equipment.
The IRS came auditing, and things ended up in Tax Court:

Petitioner purchased the equipment from 2002 to 2004 for use in his studio recording business. Petitioner contends that the equipment was not used until 2004 and was therefore placed in service that year.
Respondent contends the equipment was placed in service in 2002 and 2003 because petitioner tested some pieces of equipment before 2004. Respondent argues that the equipment was thus ready and available for its specifically assigned function at that time. We agree with petitioner.

Judge Gerber explains the rules (citations omitted):
Individual components are treated as a single property for tax purposes when they are functionally interdependent. Regardless of the amount of testing petitioner performed on each individual component, the equipment was not capable of performing its assigned function until interconnected and capable of supporting the operation of the studio. Each piece of equipment was thus essential to the operation of the studio as a whole and was not useful or able to be used to operate a business by itself.

That’s a taxpayer victory here, but it also implies a warning to taxpayers: if your machinery is still in shipping crates needing to be put together at year-end, it’s probably not yet eligible for depreciation or Sec. 179 deductions. If you want the deduction this year, get it out of the box and hook it up!
Cite: Brown, T.C. Summ. Op. 2009-171
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Drive away in luxury for $14,800

Friday, April 10th, 2009 by Joe Kristan

The IRS has issued (Rev. Proc. 2009-24) the maximum depreciation allowances for autos and trucks under the Sec. 280A “luxury auto” rules. Luxury is a bargain; the limits affect cars costing over $14,800. That means this fine Chevy Cobalt, listed for $14,998, is luxurious.
If you don’t take bonus depreciation (and you can’t for used vehicles), the annual depreciation limits are:

1st Tax Year $ 2,960
2nd Tax Year $ 4,800
3rd Tax Year $ 2,850
Each Succeeding Year $ 1,775

If you buy a new car and take the 50% bonus depreciation, the limits are:

1st Tax Year $ 10,960
2nd Tax Year $ 4,800
3rd Tax Year $ 2,850
Each Succeeding Year $ 1,775

You can find the 2008 figures here.
The truck and van limits are in the extended entry below.



Bonus depreciation in conference stimulus bill

Friday, February 13th, 2009 by Joe Kristan

The conference version of the stimulus monstrosity extends the 50% bonus depreciation through 2009; it had expired at the end of 2008. It also gives corporations another chance to accelerate AMT and research credits in lieu of bonus depreciation (Sec. 1201 of the bill).
Under 50% bonus depreciation, a taxpayer gets to deduct half of the cost of an asset purchase in the year of purchase; the remaining 50% would be depreciated under the usual depreciation rules. For an asset with a five-year life, that means the taxpayer recovers 60% of the asset cost in the first year in computing taxable income (50% + 1/5 x 50%).


Party like its 2002

Tuesday, January 20th, 2009 by Joe Kristan

The era of hope and change looks surprisingly like 2002. The text of the House Ways and Means tax bill is now available (hat tip: Benefitsblog), and its business proposals take us to the future by going back seven years:
– a five-year carryback for NOLs incurred in 2008 or 2009;
– 50% bonus depreciation for property placed in service in 2009.
– Extension of $250,000 bonus depreciation through 2009.
The bonus depreciation and Sec. 179 provisions extend current law one extra year.
The NOL provisions allow 100% offset of alternative minimum taxable income for the carrybacks. They also allow taxpayers to carryback only two years, rather than five. TARP recipients are shut out of the five-year carrybacks.
There are a few provisions that aren’t reruns of Bush stimuli. Taxpayers with income up to $75,000 of AGI ($150,000 for joint filers) get a “Making Work Pay” credit of up to $500, or $1,000 on joint returns. So your $75,000 job doesn’t pay now, but an extra $500 will make all the difference, apparently.
The bill also repeals the requirement that taxpayers receiving the first time homebuyer “credit” repay the amounts. Now the IRS goes from being the lender of first resort straight into the down-payment assistance business.
The bill also includes some other miscellaneous credits, including a temporary increase in the earned income credit and some new education credit provisions.
Dr. Maule correctly notes: “Just Because It Didn’t Work the First 50 Times Doesn’t Mean It Will Work Next Time.”
Hope and Change, indeed.


Bonus depreciation, individual credits highlight House stimulus plan

Friday, January 16th, 2009 by Joe Kristan

The House Ways and Means Committee has released a sketchy outline of the tax provisions for the proposed economic stimulus package. Business provisions include:



Thursday, March 27th, 2008 by Joe Kristan

Governor Culver yesterday signed HF 2417, exempting the federal “stimulus” rebates from Iowa income tax. The Des Moines Register has details.



Wednesday, March 12th, 2008 by Joe Kristan

The legislature yesterday passed the bill (HF 2417) to exempt the federal “stimulus” rebate checks from Iowa Income tax. Governor Culver is expected to sign the bill.
Unfortunately, there’s no sign that the legislature will conform Iowa tax law to adopt the federal depreciation and asset expensing provisions of the federal stimulus bill, forcing Iowa businesses to keep a separate set of fixed asset records at their own expense. Why? Because Microsoft, Google and itinerent filmmakers are more important to the Legislature than your business and your employer.



Monday, March 10th, 2008 by Joe Kristan

The Department of Revenue has posted a tentative summary of how the provisions of the stimulus package will affect Iowa taxpayers. The summary is tentative, as the legislature still hasn’t passed the bills that address this. Short version:
– Stimulus payments will be exempt from Iowa income taxes, and
– Iowa probably won’t conform to federal depreciation and Sec. 179 changes.
That means Iowa taxpayers can look forward to years of notices asking why Iowa and federal income are different, because Iowa’s legislators are more concerned about Microsoft than the businesses that have always been here. Oh, and because the Department of Revenue can’t be bothered to design a form that reconciles federal and Iowa taxes, so they issue annoying notices asking taxpayers do do their own reconciliations later.