Why Business Equipment Deductions Are Drastically Different for 2010, as Compared With 2009

Q. How much can my business deduct for 2010 (and 2009) for purchasing new equipment and software?

A. If you run a business, you can immediately deduct the cost of qualifying equipment with the Section 179 deduction. For 2010, the maximum deduction amount has dropped to $134,000 (unless Congress acts to extend a higher $250,000 amount allowed for 2009). Another "bonus depreciation" tax break also expired and is currently not available for the 2010 tax year.

Here are two tax breaks that were available for 2009 under a stimulus law:

1. A Generous Section 179 Allowance for New and Used Equipment (including Software) for 2009

Many small businesses qualify for an immediate federal income tax deduction for up to $250,000 of purchased equipment and software. If your business uses the calendar year for tax purposes, the deadline for placing items in service is December 31, 2009. If your business uses a fiscal year (for example, one with an October 31 year end), your deadline is later.

This valuable tax break is called the Section 179 depreciation deduction. It's a helpful exception to the general rule that businesses must depreciate most equipment and software costs over several tax years. Both new and used assets qualify but leased equipment is not eligible.

2. First-Year Bonus Depreciation for New Equipment and Software

Another beneficial 2009 depreciation tax break is available for most new equipment and software, as well as certain leasehold improvements. (Used assets do not qualify.) This second tax break generally applies to qualifying assets that were purchased (not leased) and put to use by December 31, 2009. For these items, your business can generally claim first-year bonus depreciation deductions equal to 50 percent of the cost that remains after subtracting any allowable Section 179 write-offs.

Important: While larger businesses may be ineligible for the Section 179 deduction, 50 percent first-year bonus depreciation is available to any business regardless of size. In addition, unlike Section 179 deductions, 50 percent first-year bonus depreciation deductions can create or increase an overall business tax loss for the year. In turn, that can create or increase a federal income tax net operating loss (NOL) for the year. Obviously, NOLs are much more likely in a bad economy, and they are very helpful to your business cash flow cause because you can carry them back to prior tax years and collect a refund for some or all of the taxes paid in those years.

Example: Let's say you report an NOL on your 2009 Form 1040. You can generally carry it back to your 2007 and 2008 tax years and recover some or all of the federal income taxes you paid in those years. Alternatively, you can choose to forgo a carry-back and instead carry the entire 2009 NOL forward to the next 20 years (starting with 2010) to offset income earned in future years that might otherwise be taxed at rates that are much higher than today's rates.