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How Year-end Purchase of Business Equipment Can Save on Taxes

Bonus first-year depreciation generally isn't available for purchases of qualifying assets in 2015 unless Congress extends it, but year-end purchases of depreciable property still can achieve significant tax savings even if bonus depreciation isn't revived. One key for savings is the half-year convention that generally applies in the computation of cost recovery deductions for the year that property (other than real property) is first placed into service.

Is bonus depreciation gone for good? Bonus depreciation—the ability to claim boosted first-year depreciation deductions for qualifying assets—has been a staple of business year-end planning since it was introduced by the Job Creation and Worker Assistance Act of 2002 (PL 107-47). However, bonus depreciation is a temporary provision in the Code, and, although it has been extended many times, sometimes retroactively, currently it is in expired status. Unless Congress retroactively reinstates and extends it, bonus depreciation under Code Sec. 168(k) applies only to qualified property acquired and placed in service after Dec. 31, 2011, and before Jan. 1, 2015.

As year-end approaches, keep a close eye on legislative developments. If Congress does in fact retroactively reinstate and extend bonus depreciation, as it has done many times before, it will amount to windfall savings for 2015 for taxpayers that have already bought qualifying new assets (generally, those with a MACRS recovery period of 20 years or less) and place them in service this year. A retroactive reinstatement also could mean substantial savings for “last minute” purchases of eligible assets. That's because the bonus first-year depreciation deduction applies without any proration based on the length of time that an asset is in service during the tax year.

Additionally the company may be able to deduct the entire equipment purchase in the current year by using the expensing election. Using the expensing election is an option only for companies that don't make large capital purchases during the year. Under current rules, for qualified property placed in service in tax years beginning after 2014, the maximum expensing amount is $25,000. And if more than $200,000 of expensing-eligible property is placed in service during the year, the maximum expensing amount is reduced dollar-for-dollar by the excess. Thus, unless Congress changes the rules, no amount can be expensed if $225,000 or more of Code Sec. 179-eligible property is placed in service during the year.