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Friday, January 6, 2012

AHC Washington Update: Two Tax Benefits Revert to Prior Levels

Courtesy American Horse Council

Despite the acrimony and brinksmanship, Congress eventually passed an extension of the payroll tax reductions in late December maintaining the 2% reduction in payroll taxes for workers and the self-employed.  The relief is good for two months through February, 2012.  Negotiations are already underway between the House and Senate to find a way to extend payroll tax relief through 2012.

But the bill ultimately passed by Congress did not extend the Section 179 expense deduction or 100% bonus depreciation at 2011 levels.  Both provisions have returned to prior levels.

Section 179 Expense Deduction

The expense deduction has returned to $125,000 for 2012 and phases out dollar-for-dollar once purchases of depreciable property reach $500,000.  The 179 expense deduction applies to horses, farm equipment and other depreciable property used in a business and permits a horse owner or breeder to write-off up to $125,000 in assets purchased and placed in service in one's horse business in 2012.

The expense allowance for 2010-2011 was $500,000 and phased out after purchases exceeded $2 million.

Bonus Depreciation

In addition, bonus depreciation has returned to 50% for 2012.  Bonus depreciation allows horse owners and other horse businesses to write off 50% of the cost of "new" capital assets, including horses, when purchased and placed in service in 2012.  To be eligible for bonus depreciation the original use of the property must commence with the taxpayer.  Any prior use makes the property ineligible.

Bonus depreciation was 100% for eligible assets purchased and placed in service from September 8, 2010 through 2011.

Both provisions can be used together.

Retroactive Change is Possible

It is possible that the higher levels could be reinstated retroactively to January 1, 2012.  In fact, the House-passed payroll-tax bill extended 100% bonus depreciation through 2012, but the Senate bill did not.  The ongoing January-February negotiations on the one-year extension of the payroll tax reduction could include other changes to the tax code, such as the expense deduction or bonus depreciation.  But this is speculation at this point.

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