What was bonus depreciation?
Generally speaking, bonus depreciation allowed for the immediate expensing of a percentage of the acquisition cost of new equipment
- For 2008 through the latter portion of 2010, this amount was limited to 50%.
- Beginning in late 2010 and through 2011, the amount increased to 100%.
- For 2012 and through 2013, the amount was reduced to 50%.
- As of December 31, 2013, bonus depreciation has expired and is no longer available for purchasers of qualifying equipment.
What the expiration of bonus depreciation means to you:
If you have taken advantage of bonus depreciation and are now planning to sell assets, you could be facing a very large tax bill. Why? Because bonus depreciation immediately drives down the tax basis of those assets. While bonus depreciation has provided equipment owners with immediate, additional depreciation expense to drive down taxable income, it has come at a future and potentially unanticipated cost. When those assets are eventually sold, that low (or zero) tax basis can translate into significantly larger taxable gains.
The solution, 1031 Like-Kind Exchanges:
There's a simple tax strategy that's already in place, Section 1031
Refers to the "nature or character" of the property and not to its "grade or quality." That is, real property held for investment or the productive use in a trade or business may generally be exchanged on a tax-deferred basis for other real property. Personal property held for investment or the productive use in a trade or business may generally be exchanged on a tax-deferred basis for other personal property, provided the personal property is of "like kind" or "like class." Professional tax advice should be obtained when planning exchanges.
Exchanges (LKEs). If you are selling and potentially replacing your equipment, it's time to revisit this time tested and proven approach. An LKE allows asset owners to defer current taxable gains when assets are sold and then followed by a purchase of "like-kind" assets. It's a powerful way to increase cash flow and keep your money right where it belongs, growing your business. Let's look at an example and pay particularly close attention to the "cash available for replacement equipment" - that's a 67% increase in cash immediately available for the investment in replacement assets!
Do not delay:
If you are planning on selling and purchasing replacement equipment, it's critical to begin the planning process right away. The LKE rules require that the right LKE documents be in place prior to selling (or buying) anything you wish to award Section 1031 treatment to. Do not get caught in the bonus depreciation trap, call Accruit today.