Some good news for business owners, the Small Business Jobs Act of 2010 (H.R. 5297) was signed into law on September 27, 2010. One major component of the legislation is related to the purchase of equipment and leasehold improvements. Below we have outlined the key issues that may impact your business.
Section 179 Expensing Provision Modifications:
Increased amounts: For years starting in 2010 and 2011, the maximum Section 179 expense amount is increased to $500,000 (up from $250,000 in 2010) and the investment ceiling increases to $2,000,000 (up from $800,000 in 2010).Unless these amounts are changed or extended, for tax years beginning in 2012, the maximum Section 179 expense amount will be reduced to $25,000 and the investment ceiling threshold will be $200,000 (both of these amounts to be indexed for inflation).
Expanded Section 179 property: For years starting in 2010 and 2011, the Act expands the definition of Section 179 property to include qualifying real property (certain leasehold improvements, restaurant property and retail improvement property) and allows businesses to claim $250,000 of Section 179 expense on it. Note that for purposes of the $500,000 limitation mentioned above, no more than $250,000 can be claimed on qualifying real property.
“Qualifying real property” for this purpose is the following:
a) Qualifying leasehold improvements are:
• Interior improvements made to leased nonresidential real property,
• Occupied exclusively by the lessee or sub-lessee,
• Placed in service more than three years after the building was first placed in service, and
• Cannot constitute an enlargement of the building, nor can it be an elevator, escalator, a structural component benefitting a common area, nor an interior structural component.
b) Qualifying restaurant property is:
• Section 1250 property,
• An improvement to a building (or a building), and
• Where more than 50% of the square footage is devoted to the preparation of, and seating for on-premises consumption of, prepared meals.
c) Qualifying retail improvement property is:
• An improvement made to the interior of nonresidential real property,
• Has a portion open to the general public and used in retail sales,
• Placed in service more than three years after the building was first placed in service, and
• Cannot constitute an enlargement of the building, nor can it be an elevator, escalator, a structural component benefitting a common area, nor an interior structural component.
No amount of any claimed but unused Section 179 expense attributed to qualifying real property may be carried over to a tax year beginning after 2011. Furthermore, if Section 179 expense amount is claimed on both qualifying personal and real property and, due to the taxable income limitation, a carryover amount results, such carryover must be prorated between both types of property.
Off-the-shelf computer software: The provision qualifying off-the-shelf computer software as Section 179 property is extended for one year. Therefore such software qualifies as Section 179 property if placed in service in tax years beginning after 2002 and before 2012.
Revocation: A taxpayer’s ability to revoke a Section 179 election without the consent of the IRS is extended for one year. Therefore, a taxpayer may now revoke a Section 179 election with respect to any tax year beginning after 2002 and before 2012.
What You Should Consider – Section 179 Expense
There are number of challenges associated with applying the Section 179 provisions of the Small Business Jobs Act of 2010:
• The need to decide whether you should claim Section 179 and/or bonus depreciation on an asset.
• The need to calculate the maximum allowable Section 179 expense amount on qualifying property, taking into consideration the investment ceiling limitation, as well as the taxable income limitation,
• The need to determine if the business’s real property qualifies for claiming Section 179 expense,
• The need to prorate any carryover amount of Section 179 expense between personal and real property,
• The need to determine if computer software qualifies for the Section 179 expense deduction,
• The need to determine if the state income tax return allows Section 179 expense to be claimed, and
• The need to correctly determine the basis and gain/loss amounts for assets on which Section 179 expense is claimed.
Source (BNA & CCH)
