Up to $500K of Capital Assets Now Deductible

10/14/2010

By Mark Corey, CPA

One important provision in the Small Business Jobs Act of 2010 is an increase in the capital asset expensing allowed under §179 of the Internal Revenue Code. The amount of §179 assets that can be expensed has been raised to $500,000 for 2010 and 2011 up from $250,000 in 2009. There is an investment limit that was also raised to $2,000,000. The “investment limit” means that every dollar of qualifying §179 properly placed in service over $2,000,000 reduces the amount of §179 expense by one dollar. So, for example, if $2,500,000 of qualifying §179 property is placed in service during 2010 you would not be able to take any §179 expense for the 2010 tax year.

One interesting new provision has to do with “qualified real property”. For tax years 2010 or 2011, a taxpayer can elect up to $250,000 of the $500,000 §179 deduction limit for qualified real property. Qualified real property is:

• Qualified leasehold improvement property (§168(e)(6))
  • The term “qualified leasehold improvement property” means any improvement to an interior portion of a building which is nonresidential real property if such improvement is made under or pursuant to a lease by the lessee, or by the lessor, it is to be occupied exclusively by the lessee, and the improvement is placed in service more than three years after the date the building was first placed in service.
  • Qualified leasehold improvement property does not include any improvement for which the expenditure is attributable to the enlargement of the building, any elevator or escalator, any structural component benefiting a common area, and the internal structural framework of the building.
  • In the case of an improvement made by the lessor, such improvement shall be qualified leasehold improvement property only as long as it is held by the lessor.
• Qualified restaurant property (§168(e)(7))
  • "Qualified restaurant property" means any §1250 property that is a building, or an improvement to a building, if more than 50 percent of the building's square footage is devoted to the preparation of, and seating for on-premises consumption of, prepared meals.
• Qualified retail improvement property (§168(e)(8))
  • "Qualified retail improvement property" means any improvement to an interior portion of a building which is nonresidential real property if such portion is open to the general public and is used in the retail trade or business of selling tangible personal property to the general public, and such improvement is placed in service more than three years after the date the building was first placed in service.
  • The improvement continues as a “qualified retail improvement property” only so long as held by the party that placed it in service.
  • Qualified retail improvements do not include improvements that are related to the enlargement of the building, any elevator or escalator, any structural component benefitting a common area, or the internal structural framework of the building.
• Heating and air conditioning units do not qualify, and neither does property used outside the United States or property used in connection with apartment buildings (but not hotels and motels). However, heating and air conditioning units may be qualified real property depending on the interpretation of §1250 and §1245 property as it relates to heating and air conditioning units. The IRS may have to provide guidance on these items to provide a clear answer on whether they can be expensed under these new §179 rules.
• If a taxpayer is unable to use all of their 2010 §179 deduction for qualified real property because of a limitation due to the taxpayer’s active trade or business income, the disallowed amount can be carried forward to 2011. If all or a portion of that amount is not used in 2011, that unused amount plus any 2011 disallowed §179 deductions attributable to qualified real property are treated as property placed in service in 2011 for purposes of calculating depreciation (Joint Committee on Taxation, Technical Explanation of the Tax Provisions in H.R. 5297, the "Small Business Jobs Act of 2010," (JCX-47-10), September 16, 2010).

Several states, such as California, Florida, Indiana, New Jersey, and Wisconsin, don’t follow the federal §179 rules. It will be important to watch for any state updates on their federal §179 conformity to determine how to handle your depreciation for state purposes.

The §179 rules are complicated so if you have any questions regarding their application, please consult your tax advisor.