2011 will give businesses a much needed shot in the arm. In accordance with a new tax law, customers who acquire warehouse storage systems and shelving, and claim them as a capital expense, can be entitled to a depreciation of 100 percent. If these purchases are installed and in use by December 31, this means reducing tax payments by the customer to the IRS.
Under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 tax law, 100 percent of the federal tax deduction may be taken up front in 2011. This would be in lieu of smaller annual deductions spread out over the life of the product. In 2012, the federal tax deduction will go down to 50 percent.
There are two significant benefits of 100 percent bonus depreciation:
- It is not limited in amount: this incentive is applicable to projects of all sizes. This incentive could potentially provide a tax savings of one third the cost (depending on your corporate tax rate).
- It can create a net operating loss to be carried back to prior years and result in a tax refund: if the purchase of the warehouse system causes a loss to the customer in 2011, that loss can be used to offset previous years' profits. This would make it possible to obtain a refund from the IRS, and customers with a net operating loss can carry forward the loss to offset future income taxes to the IRS.
To understand how this deduction would apply, here is a specific example:
$10,000 shelving capital purchase. The IRS allows a 100 percent deduction in 2011.
That $10,000 at the corporate tax rate of 35 percent saves the customer $3,500 paid to the IRS in 2011. $10,000 purchase price, less $3,500 saved in taxes, leaves an indirect cost of only $6,500!
$10,000 shelving capital purchase. The IRS allows only a 50 percent deduction.
That 50 percent ($5,000) at the corporate tax rate of 35 percent saves the customer $1,750 in taxes paid to the IRS. The balance of the $5,000 deduction is spread out over seven years, the life of the asset per the IRS MACRS schedule. (This depreciation schedule is also subject to other Bonus depreciation rules.)
To get the most out of this tax initiative, please consult your tax professional for specifics related to your company.
The bottom line is that your bottom line improves if you purchase in 2011.