Written by: Angela Shields   Purchasing new equipment could drastically lower your tax liability!!   Recent tax law changes could make the upcoming year the best time to purchase a new piece of equipment. During December 2010 the President signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (TRJA) in hopes of providing incentives for small businesses. This law could mean big tax savings for Federal, as well as Pennsylvania, and create cash flow.   What incentives are available for your business? The TRJA extended bonus depreciation for 2011 and 2012, as well as Section 179 expensing limits through the end of 2012. New equipment placed in service after September 7, 2010 and before December 31, 2011 will be eligible for a 100 percent bonus depreciation deduction. Purchases before September 7, 2010 and after December 31, 2011 are eligible for 50 percent bonus depreciation.   How will this help your small business save taxes and create cash flow? Electing to take the bonus depreciation on new equipment purchased could lower your current year taxable income and possibly create a loss. Unlike Section 179, bonus depreciation can create a loss that can be carried forward or carried back. Carrying the loss forward could offset future tax liability and carrying the loss back could lower previously taxed income, thus lowering the taxes due in the past and creating a refund. Both options could put cash in your hands and relieve some of the burden of purchasing that new piece of equipment.   How does this effect Pennsylvania Taxable Income? Prior to 2010 Pennsylvania law did not allow for a bonus depreciation deduction. On February 24, 2011 Pennsylvania issued Corporate Tax Bulletin 2011-01 stating that no adjustment for a 100 percent bonus depreciation deduction was necessary, therefore allowing 100 percent bonus depreciation deduction for Pennsylvania income tax purposes.   Can Section 179 and bonus depreciation be combined? Yes, and in fact the combination can be made to allow the best possible tax scenario. Section 179 can be taken on new or used equipment, however there are limitations imposed on this deduction.   What type of equipment qualifies for bonus deprecation? To be eligible for bonus depreciation, the equipment must be brand new. Leased equipment purchased after 3 months of leasing qualifies, as long as your business leased the equipment brand new (never been leased by another). The equipment must have a recovery period of 20 years or less and certain types of water utility property, software, and leasehold improvements also qualify.   At O’Polka & Company, we strive to create the best possible tax outcome for our clients. If you are contemplating purchasing a new piece of equipment and feel your business may be eligible to take advantage of this deduction please feel free to contact us. As with all tax law changes, the pros and cons of this deduction must be weighed and tax projections should be calculated for the best results.