November 1 , 2009 - As the end of the year approaches, I'm considering making capital purchases for my business. HOwever, I'm unsure about whether to make those purchases before or after December 31st.

Encouraging news from the U.S. Census Bureau about increases in orders for and shipments of manufactured durable goods, and higher nondefense orders for capital goods show that businesses, finally, are loosening their purse strings. And, from the tax viewpoint, now is a good time to buy, too, thanks to the availability of bonus first year depreciation, an extraordinarily high expensing amount, and short writeoffs for diverse assets such as farm machinery and equipment, leasehold improvements, restaurant buildings and improvements, and retail improvements. However, these tax breaks may not be around after this year due to mounting concerns about expanding budget deficits.

Utilizing the midquarter convention: The half-year convention generally applies in the computation of depreciation deductions for property first placed in service during the current tax year. Under this convention, a business asset placed in service at any time during the tax year is generally treated as having been placed in service in the middle of that year

However, the half-year convention only applies if property placed in service during the last three months of the tax year doesn't exceed 40% of all of such property placed in service during the entire year. If it does, then a midquarter convention applies. Under that rule, personal property placed in service during any quarter of the tax year is treated as if it had been placed in service at the middle of the quarter in which it was placed in service.

The standard wisdom has been that businesses should try to avoid final quarter purchases because doing so could trigger the midquarter convention. However, the availability of bonus first year depreciation this year on most new machinery and equipment purchases substantially diminishes the hazards of buying in the last quarter. It may be possible in some cases to avoid application of the midquarter convention by electing to expense property placed in service during the last quarter. On the other hand, deliberately exceeding the 40% limit to trigger the midquarter convention may be a sound strategy where the taxpayer has placed a large amount of property in service during the first quarter of the year.

Section 179 Expensing Limits: Under Code Sec. 179, a taxpayer, other than an estate, trust, and certain noncorporate lessors, can elect to deduct as an expense, rather than to depreciate, up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in the taxpayer's trade or business. The maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of Code Sec. 179 property placed in service during the tax year in excess of a specified investment ceiling. The amount eligible to be expensed for a tax year can't exceed the taxable income derived from the taxpayer's active conduct of a trade or business. Any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding tax years.

For tax years beginning in 2009, the expensing limit is $250,000 and the investment ceiling limit is $800,000. However, unless Congress modifies the rules once again, the expensing limit for 2010 will be halved to $125,000 and the investment ceiling will be reduced to $500,000 . The current, generous expensing limits mean that most small businesses, and even some medium size businesses with moderate capital equipment needs, may be able to claim a full deduction for eligible assets bought and placed in service in tax years beginning in 2009. Businesses with greater machinery and equipment needs can use bonus depreciation to write off purchases in excess of the Sec. 179 investment limit. The combination of expensing and bonus depreciation may make an especially compelling argument for accelerating purchases into this year.

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