With the depreciation bonus set to end on Dec. 31, time is running out for your company to cut its 2013 tax bill by making new capital investments.

The depreciation bonus was first enacted to help pull us out of the 2000-2002 recession.  It lapsed in 2005, but was reinstated in 2008 as the economy again took a turn for the worse.  Congress has renewed the law ever since; but given recent signs of economic strength, it’s unlikely lawmakers will extend it again.

Here’s what you need to know to take advantage of the depreciation bonus in the time that’s left:

In a nutshell, the law lets a company that buys new equipment in 2013 write off 50 percent of the value plus the percentage of remaining basis that it would normally deduct in the first year.  That, in turn, reduces the company’s taxable income, which in turn reduces the company’s tax bill.

Here’s an example of how it works.  Assume you buy a new $100,000 asset with five-year MACRS life.  Under the temporary law, you can write off $50,000 (50 percent bonus depreciation) plus $10,000 (20 percent of remaining $50,000 in basis) for a total write-off (taxable income reduction) of $60,000.  If you’re in the highest tax bracket, that can mean a savings of $15,840 off your 2013 tax bill.

To qualify, the equipment must be:

1.  New (first use must occur with the taxpayer claiming the bonus depreciation);
2. Depreciable under MACRS with a cost recovery period of 20 years or less;
3. Put in service in calendar year 2013 (so don’t wait until Dec. 31 to place your order!); AND
4. Purchased in 2013.

A couple additional things to keep in mind:

• There’s no limit on the value of the assets that can be depreciated.
• The depreciation bonus can be combined with Sec. 179 (which allows some companies to expense new AND used capital asset purchases) for even more tax savings.
• The depreciation bonus isn’t mandatory (you can opt out).
• Depreciating more of an asset’s value this year means you’ll have less to depreciate in the future, so your tax bills in the out-years could be higher (but consider the time value of the money – would you rather have Uncle Sam holding onto it or be able to use it now to pay workers, make other investments in your company, etc.)
• The law can also put you in a negative tax situation if you sell the asset before the end of its tax life.  However, the pain can be negated by taking advantage of Like-Kind Exchange rules.
• Some states have disallowed the depreciation bonus, so claiming it on your federal return may create some complexities when you file with the state.

More information about the law is available at http://www.depreciationbonus.org and at http://www.irs.gov/publications/p946/index.html.

Of course, the tax code is incredibly complex and every company’s tax situation is unique.  This article isn’t intended to be tax or legal advice.  Be sure to check with your tax professional before making any purchase with the intention of claiming depreciation bonus.