Modified Accelerated Cost-Recovery System (MACRS) *
Under the federal Modified Accelerated Cost-Recovery System (MACRS), businesses may recover investments in certain property through depreciation deductions. The MACRS establishes a set of class lives for various types of property, ranging from three to 50 years, over which the property may be depreciated. A number of renewable energy technologies are classified as five-year property (26 USC § 168(e)(3)(B)(vi)) under the MACRS, which refers to 26 USC § 48(a)(3)(A), often known as the energy investment tax credit or ITC to define eligible property. Such property currently includes:
- a variety of solar-electric and solar-thermal technologies
- fuel cells and microturbines
- geothermal electric
- direct-use geothermal and geothermal heat pumps
- small wind (100 kW or less)
- combined heat and power (CHP).
- The provision which defines ITC technologies as eligible also adds the general term "wind" as an eligible technology, extending the five-year schedule to large wind facilities as well.
In addition, for certain other biomass property, the MACRS property class life is seven years. Eligible biomass property generally includes assets used in the conversion of biomass to heat or to a solid, liquid or gaseous fuel, and to equipment and structures used to receive, handle, collect and process biomass in a waterwall, combustion system, or refuse-derived fuel system to create hot water, gas, steam and electricity.
The 5-year schedule for most types of solar, geothermal, and wind property has been in place since 1986. The federal Energy Policy Act of 2005 (EPAct 2005) classified fuel cells, microturbines and solar hybrid lighting technologies as five-year property as well by adding them to § 48(a)(3)(A). This section was further expanded in October 2008 by the addition of geothermal heat pumps, combined heat and power, and small wind under The Energy Improvement and Extension Act of 2008.
The federal Economic Stimulus Act of 2008, enacted in February 2008, included a 50% first-year bonus depreciation (26 USC § 168(k)) provision for eligible renewable-energy systems acquired and placed in service in 2008. This provision was extended (retroactively for the entire 2009 tax year) under the same terms by The American Recovery and Reinvestment Act of 2009, enacted in February 2009. Bonus depreciation was renewed again in September 2010 (retroactively for the entire 2010 tax year) by the Small Business Jobs Act of 2010 (H.R. 5297). To qualify for bonus depreciation, a project must satisfy these criteria:
- the property must have a recovery period of 20 years or less under normal federal tax depreciation rules;
- the original use of the property must commence with the taxpayer claiming the deduction;
- the property generally must have been acquired during 2008, 2009, or 2010; and
- the property must have been placed in service during 2008, 2009, or 2010
If property meets these requirements, the owner is entitled to deduct 50% of the adjusted basis of the property during the tax year the property is first placed in service. The remaining 50% of the adjusted basis of the property is depreciated over the ordinary MACRS depreciation schedule. The bonus depreciation rules do not override the depreciation limit applicable to projects qualifying for the federal business energy tax credit. Before calculating depreciation for such a project, including any bonus depreciation, the adjusted basis of the project must be reduced by one-half of the amount of the energy credit for which the project qualifies.
For more information on the federal MACRS, see IRS Publication 946, IRS Form 4562: Depreciation and Amortization, and Instructions for Form 4562. The IRS web site provides a search mechanism for forms and publications. Enter the relevant form, publication name or number, and click "GO" to receive the requested form or publication.
* Note that the definitions of eligible technologies included in this entry are somewhat simplified versions of those contained in tax code, which often contain additional caveats, restrictions, and modifications. Those interested in this incentive should review the relevant sections of the code in detail prior to making business decisions.
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Section 179 Deduction: Business Equipment Depreciation *
Updated: 11/12/11
Most new business equipment can be either depreciated over its useful life or expensed immediately under Internal Revenue Code Section 179. The maximum deduction is based on the following schedule for the date in which the tax year begins. Each 1040, whether Single or Joint, is limited to one maximum. 179 expenses passed through via K-1s from partnerships (1065), S-corps (1120S), or trusts (1041) are limited at the 1040 level to the one maximum amount. A C corporation is able to deduct its own 179 expenses in addition to what is claimed on the 1040s of the owners. This is one of the many ways in which C corporations can save thousands of dollars in taxes over S corps.
The following table is of the Federal maximums. Many states have not matched these amounts and have much smaller allowable deductions. In those cases, it is critical to maintain two sets of depreciation schedules; one for IRS and another for the State. Since the basis of an asset may be different for each tax agency, the gain or loss on its disposal will similarly be different.
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2006
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$108,000 |
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2007
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$125,000 |
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2008
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$250,000 |
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2009
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$250,000 |
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2010-2011
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$500,000 |
For tax years beginning in 2003 through 2009, a taxpayer may make, revoke or change an election without IRS consent on an amended return filed during the period prescribed for filing an amended return (e.g., within three years from filing original return). For other taxable years, unless permission is obtained, an election not made on an original return must be made on an amended return filed by the due date of the original return (including extensions).
Qualifying Property
Generally, the types of business equipment that qualify for this expensing election are the same kind that qualified for the now-defunct Investment Tax Credit. Most movable assets qualify. Permanent structures do not qualify. Business vehicles with a gross vehicle weight over 6,000 pounds qualify for the full Section 179, while lighter vehicles have a much lower dollar limit.
Currently, the maximum amount that can be claimed for SUVs weighing between 6,000 and 14,000 pounds is $25,000. The remaining Section 179 deduction can be used for other kinds of business equipment, including vehicles weighing more than 14,000 pounds.
In Addition, to be eligible for the Section 179 deduction, the asset must be used at least 50% for business in the first year it is placed in service. The cost eligible for the deduction is the business usage percentage.
Another common question people ask is whether the Section 179 expensing election is only available for the purchase of brand new assets or whether things such as used vehicles qualify. The answer is still the same. The asset just has to be new to you. You can claim the deduction for items purchased from anyone other than yourself or an entity controlled by you, such as a closely held corporation.
Here are more details on qualifying and non qualifying property, courtesy of the indispensable QuickFinder reference book.
Qualifying Property:
- Tangible personal property (such as machines, equipment, furniture).
- Certain other tangible property used for specific purposes.
- Single-purpose agricultural or horticultural structures.
- Certain storage facilities.
- Railroad grading or tunnel bores.
*Please note this is for informational purposes only. You should contact a professional tax accountant before making any decisions on a purchase. The information provided cannot be relied upon without consulting a tax professional.
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