By Mark E. Battersby
Thanks to the 100-percent “bonus” depreciation write-offs created by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, many U.S. tent and event rental businesses are discovering that capital investments in equipment are more affordable today than ever before. Unfortunately, many of the tax write-offs that make these purchases so affordable are available only for 2011.
Bonus depreciation was originally created in 2002 as a temporary economic incentive by which companies could immediately deduct 30 percent of the basis of qualifying assets. Although the concept of taking the additional depreciation in the first year is quite simple, changes to the applicable percentage, timeframes during which each is available and variations related to unique types of assets that qualify have made application of the rules somewhat complex.
The definition of property that is eligible for bonus depreciation under the 2010 Tax Relief Act is the same as under prior law, but the percentage and placed-in-service dates have changed. The percentage increased from 50 percent to 100 percent for qualifying property placed in service after Sept. 8, 2010, and before Jan. 1, 2012. Those businesses investing in qualifying assets will be able to fully deduct the cost during the current tax year.
Last fall’s Small Business Jobs Act increased the Section 179, first-year expensing dollar and investment limits to $500,000 and $2 million, respectively, for 2010 and 2011. The Tax Relief Act included a $125,000 dollar limit and a $500,000 investment limit for tax years beginning in 2012 and expiring after Dec. 31, 2012.
Unlike bonus depreciation that applies only to “new” property, a tent rental business may immediately deduct as a Section 179 expense up to $500,000 of both new and used business property placed in service during the tax year. The Section 179 expensing write-off is reduced, dollar-for-dollar, by any property acquisitions in excess of the $2 million investment ceiling, limiting the write-off to smaller businesses.
It is not only federal tax write-offs that can help reduce the cost of capital investments. Many tent and event renters making capital investments during the 2011 tax year can also benefit from state and local credit and incentive programs. In fact, many states offer a tax credit equal to a percentage of an eligible capital investment made in that state.
The prime example of a situation crying out for a business to opt out of 100 percent bonus depreciation is one for which there are about-to-expire net operating losses, the value of which would be lost if current-year income were reduced too much by claiming the maximum depreciation allowance. Similarly, an event or tent rental business that currently is and in the recent past has been in a low tax bracket and expects to be in a higher bracket in future years may want to defer depreciation deductions to offset future higher-taxed income.
Until recently it appeared that the only choice for a tent or event rental business that does not want 100 percent bonus depreciation was to elect out of bonus depreciation entirely. Now, the IRS has decided to follow Congress’ “General Explanation” for the 2010 Tax Relief Act and permit a step-down election from 100 percent to 50 percent bonus depreciation.
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 provided many opportunities designed to help businesses reap tax benefits for capital investments and provide funding for doing so. The 2011 tax year may be the optimal time to take advantage of the federal, state and local tax—and financing—incentives designed to encourage capital investments.
With a little guidance from a qualified tax advisor, a savvy tent and event rental business may be able to claim 100 percent federal bonus depreciation, the Section 179 expensing allowance, or, the tent or event renter may benefit from the soon-to-expire funding opportunities available today.