Bonus Depreciation

Under prior law, taxpayers were allowed "bonus" depreciation equal to 50% of the cost of certain new depreciable property (e.g., property with a recovery period of less than 20 years, water utility property, computer software and leasehold improvements) acquired and placed in service before Jan. 1, 2011 (before Jan. 1, 2012 for certain longer-lived and transportation property), in addition to the normal first year depreciation allowed under the Internal Revenue Code (the "Code").
The 2010 Act provides for a 100% depreciation deduction for qualifying property placed in service after September 8, 2010 and before January 1, 2012 (before Jan. 1, 2013 for certain longer-lived and transportation property). For qualifying property placed in service after December 31, 2011 and before January 1, 2013 (after Dec. 31, 2012 and before Jan. 1, 2014 for certain longer-lived and transportation property), the bonus depreciation deduction reverts to 50%. Qualified leasehold improvement property is also eligible for the 100% deduction if placed in service after September 8, 2010 and before January 1, 2012.

Section 179 Expensing

Code Section 179 allows certain taxpayers to elect to deduct immediately the cost of qualifying property placed in service during the taxable year instead of recovering the cost of such property through depreciation or amortization deductions over time. The maximum amount that may be expensed for any year generally is phased out dollar-for-dollar by the amount of Code Section 179 property placed in service during the year in excess of a specified investment ceiling. Current law provides that for tax years beginning in 2010 or 2011, the expense deduction is limited to $500,000 and the phase-out ceiling begins when property placed in service in a tax year exceeds $2,000,000. Qualifying property generally includes tangible personal property used in a trade or business, up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property), and canned software. The Section 179 election can be made for new or used property (unlike the bonus depreciation provisions described above, which require that qualifying property be newly purchased).
The 2010 Act provides that for tax years beginning in 2012, the maximum expensing amount under Code Section 179 is $125,000 and the phase-out ceiling is $500,000 (both amounts to be indexed for inflation). The expensing and ceiling amounts were scheduled to be only $25,000 and $200,000, respectively, for tax years beginning in 2012, and those lower amounts will be the applicable limits for tax years beginning after 2012.