HIRE Act Extends Increased Section 179 Expensing Election

As an incentive for business investment in capital and equipment, the Hiring Incentives to Restore Employment (HIRE) Act includes a provision that extends the previous one-year increases in the maximum amount that a business taxpayer may deduct for the cost of such an investment under Sec. 179.

Under this new provision, the maximum amount that a taxpayer may expense under Sec. 179, for tax years beginning after 2009 and before 2011, is $250,000 of the cost of qualifying property placed in service for the tax year. The $250,000 is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the tax year exceeds $800,000.

As a refresher on the Sec. 179 expensing election, business taxpayers that satisfy limitations on annual investment may elect to expense the cost of qualifying property rather than to recover the cost of their investment through depreciation deductions over the property’s useful life as determined under the tax law.

Qualifying property is depreciable tangible personal property (new or used) purchased for use in the active conduct of a trade or business. Off-the-shelf computer software placed in service in tax years beginning before 2011 is considered qualifying property. The Sec. 179 deduction may not exceed the taxable income derived by the taxpayer from the active conduct of any trade or business. Any deduction disallowed under this limitation may be carried forward to succeeding tax years, with similar limitations, but may not be carried back.

For pass-through entities, the Sec. 179 limitations are applied at both the entity level and the individual level. Individuals who own multiple interests in S corporations, LLCs, and partnerships should exercise caution not to permanently lose any Sec. 179 benefits.

The increase in the Code Sec. 179 expense deduction and phase-out limitation enacted by the HIRE Act and previous legislation is intended to provide temporary incentives for business investment, and will expire at the end of 2010. Unless there is future legislative action to increase the amounts taxpayers are permitted to deduct for tax years beginning in 2011 and thereafter, Sec. 179 deductions are limited to $25,000 of the cost of qualifying property placed in service in the tax year, reduced (but not below zero), by the amount by which the cost of all qualifying property placed in service during the tax year exceeds $200,000. These amounts are not indexed for inflation.

PLANNING NOTES

• Although the HIRE Act extends the increased Sec. 179 limitations through 2010, it does NOT extend the 50 percent bonus depreciation allowance under Code Sec. 168(k).
• Cost segregation studies may be of especial benefit with the increased Sec. 179 limitations.
• States may or may not adopt the increased Sec. 179 limitations.
• In general, trusts are not eligible for Sec. 179 allocations.

If you have any questions about the retention credit, please contact your CB&H advisor.