Investing in Fixed Assets

An effective way to reduce your tax bill, without a significant impact on your balance sheet, is to acquire equipment and other fixed assets before year end. For example, bonus depreciation allows you to immediately deduct 100% of the cost of qualified new assets (such as equipment, business vehicles and furniture) placed into service in 2011. Next year, it scheduled to drop to 50% (with certain exceptions), though an extension of 100% bonus depreciation has been proposed. (Check with your tax advisor for the latest information.)

Alternatively, you can expense qualified asset purchases under Internal Revenue Code Section 179. Such expensing is available for both new and used property. However, Sec. 179 expensing is limited to $500,000. And that cap is further reduced, dollar for dollar, once total purchases for the year exceed $2 million. Next year, these limits are scheduled to drop to $125,000 and $500,000, respectively, though both amounts will be indexed for inflation.

Keep in mind that Sec. 179 expensing requires an affirmative election on your tax return, but bonus depreciation is automatic. If you don't want to claim bonus depreciation, you can opt out for one or more asset classes. You might want to forgo expensing or opt out of bonus depreciation if you believe that increasing marginal tax rates or other changes will make depreciation deductions more valuable in the future.