As the end of 2010 quickly approaches, individual taxpayers should start to execute valuable year-end tax strategies. However, year-end tax planning for 2010 is especially unique, and a bit more complicated, due to the current uncertainty looming over a number of expiring tax cuts.

As the end of 2010 quickly approaches, individual taxpayers should start to execute valuable year-end tax strategies. However, year-end tax planning for 2010 is especially unique, and a bit more complicated, due to the current uncertainty looming over a number of expiring tax cuts.

Several individual tax incentives in the form of deductions, credits, and exemptions, as well as reduced tax rates for long-term capital gains and qualified dividends, are scheduled to expire at the end of 2010. Moreover, the marginal income tax rates for most taxpayers - especially individuals in the top two income tax brackets - are scheduled to rise. The 10 percent tax rate bracket is scheduled to disappear. Another complication to year-end tax planning is the uncertainty caused by the estate and gift tax laws, and their future.

Take advantage of lower income tax rates through 2010

The individual marginal income tax rates for 2010 are: 10, 15, 25, 28, 33, and 35 percent. These rates are set to expire at the end of the year and revert to higher rates, unless Congress acts to extend them. As things stand now, however, for 2011 and beyond, the tax rate brackets will be: 15, 28, 31, 36, and 39.6 percent. The 10 percent rate will disappear entirely. Thus, the federal income tax brackets as scheduled for 2011 will result in the following:

2010: 10% 15% 25% 28% 33% 35%

2011:  15% 15% 28% 31% 36% 39.6%

In light of the scheduled rate increases, individuals that will be affected by the higher tax rates - particularly higher-income taxpayers falling into the top two brackets - may want to consider opportunities to accelerate taxable income into 2010. Accelerating income into 2010 allows you to take advantage of the current lower tax rates and avoid having some of that income taxed at higher rates next year (as the law currently stands). Although tax considerations should not be the only reason to accelerate income into 2010, if you anticipate that you will fall into a higher tax bracket in 2011 as the law currently stands, you should explore acceleration opportunities.

At the same time as you take advantage of opportunities to accelerate your income into 2010, you may want to defer deductions into 2011 to help ease the impact of the scheduled 2011 increases in the tax rates. Deductions may be more valuable in 2011 when the tax rates will be higher for many individuals and particular higher-income taxpayers. For example, consider postponing charitable giving until 2011, or delay making your mortgage payment until January 1, 2011 or later if your grace period allows.

However, higher-income taxpayers considering deferring deductions until 2011 need to weigh the potential benefit of using these deductions to help offset potentially higher taxable income with the pitfall of the re-emergence of the limit on itemized deductions. The limit on itemized deductions for higher-income taxpayers is completely eliminated for 2010, but effective again in 2011. The limitation threshold amount is generally $100,000 for most taxpayers and $50,000 for married taxpayers filing separately. Thus, if you anticipate being in a higher rate bracket in 2011 you need to carefully weigh the benefits of getting a reduced deduction that offsets income taxed at a higher rate in 2011, against a full deduction that offsets income taxed at a lower rate in 2010.

While accelerating income and deferring deductions are two generally intertwined tax planning strategies, they take on increasing importance in light of the scheduled rates increases. You should talk with your tax advisor about the benefits and pitfalls of using this technique in your particular situation.

Sell investments at lower capital gains rates

The favorable tax rates for capital gains and qualified dividends also continue through December 31, 2010, but will revert to higher levels beginning in 2011. For individuals in the 25 percent or higher income tax brackets, long-term capital gains and qualified dividends are taxed at a maximum rate of 15 percent. For individuals in the 10 and 15 percent brackets, gains are taxed at a generous five percent and zero percent. Unless Congress extends these lower rates, the maximum tax rate on long-term capital gains will increase to 20 percent, and the zero percent rate will be replaced with a 10 percent rate beginning in 2011. Also beginning in 2011, qualified dividends will be taxed at ordinary income tax rates, which could be as high as 39.6 percent.

If you have appreciated investments that you have been considering selling, now may be the time to do so in light of the increased capital gains rates. For higher-income taxpayers this is especially important since the maximum amount of tax on long-term capital gains is 15 percent for 2010, but come 2011 they will be taxed at 20 percent.

Contribute to your retirement plan

Individuals with a traditional IRA or an employer-sponsored retirement plan, such as a 401(k) plan, should consider making a contribution to the plan before year-end, if he or she has not already done so. Making a contribution to a traditional IRA or employer-sponsored retirement plan will reduce your taxable income since funds are contributed before tax. Additionally, you may be able to deduct the contribution on your return.

For 2010, the contribution limit is $5,000 for individuals under age 50 (or $6,000 for individuals older than 50 years of age who qualify for the catch-up contribution). The maximum amount an employee can contribute to a 401(k) in 2010 is $16,500 (and for individuals over the age of 50, their catch-up contribution will remain unchanged at $5,500).

Roth IRA conversions

If you convert your traditional IRA into a Roth in 2010, a special rule allows you to defer paying federal income tax on the conversion income until 2011 and 2012. In lieu of including the conversion income in your 2010 taxable income, you can choose to report half the income in 2011 and half the income in 2012. However, if you make this election, that income will be taxed at the income tax rates in effect in 2011 and 2012, which under current law, is set to be higher for the majority of taxpayers. If you want to convert your traditional IRA into a Roth before the end of the year, you will need to determine whether recognizing all the income in 2010 or spreading it between 2011 and 2012 will garner you a better tax result.

AMT planning

Congress has not enacted an alternative minimum tax (AMT) "patch" for 2010. Be aware, unless Congress enacts an AMT patch retroactive for 2010, the exempt amounts are $33,750 for individuals; $45,000 for married couples filing jointly; and $22,500 for married individuals filing separately. Planning for the AMT is complicated due to Congress's inaction on passing a patch, unfortunately. Taxpayers should, therefore, begin planning with the 2010 amounts in the alternative.

Tax breaks not available in 2010

Certain tax breaks that you may have taken advantage of in 2009, when they were around, are not available this year because they expired December 31, 2009 and have not been extended by Congress. While Congress may act to retroactively extend some, or all, of these incentives for 2010, unless Congress acts, you should be aware that the following tax breaks may not be available for your 2010 tax return:

• The additional standard deduction for state and local property taxes for non-itemizers;
• The deduction for qualified tuition and fees of up to $4,000 for higher education (the higher education expense deduction);
• The deduction of up to $250 in classroom supplies (available to teachers, other educators)
• The election to itemize state and local sales taxes in lieu of state and local income taxes (which mainly benefits individuals in states without state income taxes); and
• The exclusion from gross income of up to $2,400 of unemployment benefits.

Although these, and many other, tax incentives have not been renewed for 2010, taxpayers that have utilized these incentives in the past should include in their year-end tax planning contingencies for both outcomes: you should compute your tentative tax liability under a plan that does not take the applicable incentives into consideration and also compute your liability under a plan that does, in case Congress retroactively extends them.

Conclusion

Despite the complexity caused by the uncertain state of the tax law as of now, individuals can take a number of steps to help minimize their tax liability this year. Depending on your particular situation, you may be able to employ one or more of the planning opportunities discussed above.

2010 year-end tax planning involves consideration of tax laws going into effect in 2011 as much as it involves tax provisions effective this year. Some tax incentives that expired for businesses at the end of 2009 have been resurrected for 2010 (and 2011 in some cases), including bonus depreciation and small business expensing. However, with higher tax rates set for 2011, traditional planning techniques, such as acceleration and deferral, may require more thought this year especially. This article explores some planning opportunities, challenges, and issues presented by year-end tax planning for 2010.

2010 year-end tax planning involves consideration of tax laws going into effect in 2011 as much as it involves tax provisions effective this year. Some tax incentives that expired for businesses at the end of 2009 have been resurrected for 2010 (and 2011 in some cases), including bonus depreciation and small business expensing. However, with higher tax rates set for 2011, traditional planning techniques, such as acceleration and deferral, may require more thought this year especially. This article explores some planning opportunities, challenges, and issues presented by year-end tax planning for 2010.

Accelerating income/deferring deductions

Every year, businesses can take advantage of a traditional planning technique that involves alternatively deferring income and accelerating deductions. However, business taxpayers such as passthrough entities (limited liability companies, partnerships, S corporations, sole proprietorships) should consider accelerating business income into the current year and deferring deductions until 2011 (and perhaps beyond) in light of the scheduled 2011 tax rate increases (the top two income tax brackets are set to rise from 33 and 35 percent to 36 and 39.6 percent respectively). Since pass-through entities generally pay tax at the individual income tax rate level, and those levels are expected to rise, this may be a significant factor affecting this year's planning.

For example, limited liability companies, partnerships, and S corporations can avoid or minimize the impact of the scheduled 2011 rate increases by accelerating certain business transactions and thus income into 2010 (and deferring deductions until next year). For instance, if your business is planning to sell certain property, you may want to close the sale in 2010 to avoid the higher 2011 rates. Not only are the ordinary income tax rates scheduled to rise, but too are the capital gains rates. Thus, this strategy can generally help regardless of the type of income generated since rates in both categories are going to rise next year.

The strategy of accelerating income and deferring deductions may apply to a number of transactions affecting your business, including leasing, inventory, compensation and bonus practices, depreciation and expensing. Pass-through entities need to be particularly sensitive to the scheduled 2011 income tax rate increases and therefore plan accordingly.

Cash basis businesses that expect to be in the same or a higher tax bracket in 2011 should consider moves to shift income into 2010 by accelerating cash collections this year, and deferring deductions until next year. Thus, delay payment of certain expenses until next year, where possible, since deductions are allowed when the expenses are actually paid. If you have outstanding accounts receivable, collect on those payments due to your business in 2010.

Accrual method businesses that anticipate being in higher rate brackets next year may want to accelerate the shipment of products or provision of services into 2010 so that your business's right to the income arises this year.

Take advantage of increased small business expensing

For 2010 and 2011, businesses can benefit from enhanced Code Sec. 179 small business expensing. Congress increased the amount of qualifying property that business that immediately expense to $500,000 (up from $250,000) for tax years beginning in 2010 and 2011. This amount is reduced dollar for dollar to the extent the cost of the qualifying property placed in service during the year exceeds $2 million (increased from $800,000). The increase in the expensing cap from $800,000 to $2 million for 2010 (and 2011) effectively opens up the availability of Code Sec. 179 expensing to many more businesses. If you have bought qualifying property - even computer software qualifies - or plan to buy property, consider doing so now to take advantage of the immediate tax benefit. You can also do so again in 2011, when tax rates are expected to be higher.

Also included in the definition of qualified Code Sec. 179 property (only temporarily though) is qualified real property, which is defined as qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. However, businesses are limited to expensing of up to $250,000 of the total cost of these properties. The dollar cap applies to the aggregate cost of qualified real property.

Bonus deprecation

Bonus depreciation is not limited by the size of the business, unlike practical access to Code Sec. 179 "small business" expensing. Bonus depreciation allows taxpayers to immediately deduct 50-percent of the cost of qualifying property purchased and placed in service in 2010. Unlike Sec. 179 expensing, bonus depreciation is only available for 2010. Qualifying property must be purchased and placed into service on or before December 31, 2010.

Increased start-up expense deduction

New businesses can take advantage of the increased deduction for start-up expenditures. For 2010, the start-up expense deduction limit has been raised from $5,000 to $10,000. The phaseout threshold is also increased to $60,000 (up from $50,000). Thus, if you have incurred during 2010 costs relating to the creation of an active trade or business, or the investigation of the creation or acquisition of an active trade or business, you may be able to benefit from this increased deduction. Entrepreneurs can recover more small business tart-up expenses up-front, thereby increasing cash flow and providing other benefits.

Additional planning techniques

There are a number of other year-end tax planning strategies you may want to consider utilizing for 2010. These include potentially changing your accounting method to advance income or defer expenses (however, accounting method changes can have a binding elect on taxpayers for future years); accelerating installment sale proceeds or electing out of the installment method; electing slower depreciation methods, deferring payments of accrued bonuses; and determine if you can write-off any bad debts.

The third quarter of 2010 brought many tax developments from Congress, the IRS, and the courts. We have highlighted some of the more important federal tax developments for you. Please give our office a call or send us an email if you have any questions about these developments.

The third quarter of 2010 brought many tax developments from Congress, the IRS, and the courts. We have highlighted some of the more important federal tax developments for you. Please give our office a call or send us an email if you have any questions about these developments.

Small Business Jobs Act. On September 27, 2010, President Obama signed the Small Business Jobs Act (H.R. 5297), which includes $12 billion in tax incentives. The new law extends many business tax incentives that are effective immediately, such as bonus depreciation for 2010, enhanced Code Sec. 179 expensing for 2010 and 2011, an increased business start-up expense deduction, and more. The new law also authorizes 401(k), 403(b) and 457(b) governmental plans to permit plan participants to roll over pre-tax account distributions into a designated Roth account within their plans. However, not all of the new law’s provisions benefit businesses. One of the more controversial provisions, for example, will require individuals receiving rental income from real property to file information returns with the IRS and to service providers reporting payments of $600 or more during the year for rental property expenses.

Health FSAs. After December 31, 2010, purchases of over-the-counter medicines, without a prescription, will no longer be reimbursed by health flexible spending accounts (FSAs) or health reimbursement accounts (HRAs), the IRS reminded taxpayers. Over-the-counter medicines and drugs will continue to be reimbursable after 2010 if the taxpayer obtains a prescription for them. Over-the-counter medical supplies and equipment also will continue to be reimbursable without a prescription, as will insulin.

Small employer health insurance credit. In September, the IRS posted a draft version of Form 8941, Credit for Small Employer Health Insurance Premiums, on its web site for small employers to use to calculate the new Code Sec. 45R tax credit. The Patient Protection and Affordable Care Act created the credit to help small employers offset the costs of providing health insurance to employees. For-profit small employers will use Form 8941 to calculate the credit and include the amount of the credit as part of the general business credit on their federal income tax returns. Nonprofit small employers will claim the Code Sec. 45R credit on Form 990-T.

Passive activity loss rules. In September, the Tax Court found that the time a taxpayer was "on-call" does not count as time spent on his real estate rental properties and cannot be used to avoid the passive activity loss (PAL) limits (Moss, 135 T.C. No. 18). The taxpayer did not perform any actual work on the properties during the time he was "on-call" and, therefore, could not count those hours in trying to come under the 750-hour exception carved out for real estate professionals.

Net operating losses. in August, the IRS issued guidance on various scenarios for taxpayers to make a one-time, irrevocable election to carry back net operating losses (NOLs) for up to five years under the Worker, Homeownership, and Business Assistance Act of 2009 (2009 Worker Act). The guidance highlights the distinctions between the NOL carryback under the 2009 Worker Act and its predecessor, the American Recovery and Reinvestment Act of 2009.

Cancellation of indebtedness. The IRS issued guidance in August on the acceleration of cancellation of indebtedness (COD) income that has been deferred under Code Sec. 108(i). Code Sec. 108(i) allows businesses to defer COD income realized on the reacquisition of a debt instrument in 2009 or 2010. A taxpayer can elect to defer the income until 2014 and then recognize it ratably over five years. Code Sec. 108(i)(5)(D) requires the taxpayer to accelerate and recognize the deferred income on the occurrence of certain events. The proposed regulations describe events that trigger the taxation of deferred COD income to C corporations.

Uncertain tax positions. The IRS made some significant changes to its plans to require mandatory reporting of uncertain tax positions by corporations. In September, the IRS unveiled final Schedule UTP, Uncertain Tax Position Statement, instructions and related guidance. Among other things, the IRS adopted a five-year phase-in of the reporting requirement, based on a corporation's asset size. The IRS also removed a controversial proposed provision that would have required Schedule UTP filers to calculate the maximum tax adjustment (MTA) with respect to each tax position included on the schedule.

Payment card reporting. In August, the IRS also issued final information reporting rules for payment card and third-party network transactions. The Housing Assistance Tax Act of 2008 created Code Sec. 6050W, requiring information reporting for payments made in settlement of payment card and third-party network transactions. Generally, credit card companies and electronic payment processors will be required after 2010 to annually file aggregate transaction reports with the IRS listing their total annual payments to individual merchants who receive more than $20,000 and conduct more than 200 transactions each year.

Foreign tax reforms. On August 10, President Obama signed a package of foreign tax reforms in the Education, Jobs and Medicaid Assistance Act. In related news, the IRS issued preliminary guidance in September on new reporting and withholding imposed under the Hiring Incentives to Restore Employment (HIRE) Act of 2010 in connection with foreign financial institutions (FFIs).

Corrosive drywall. The IRS will allow taxpayers to claim a casualty loss under a safe-harbor method in connection with damages from the installation of certain imported drywall. Homeowners have reported health problems and damage to appliances and electrical systems from the drywall.

Per diem rates. The IRS issued its annual update of simplified per-diem rates that taxpayers can use to reimburse employees for lodging, meals, and incidental expenses incurred during business travel. The simplified high-low per-diems are $233 for high-cost localities and $160 for all other localities.

Home sale exclusion. In July, the Tax Court found that the voluntary demolition of a principal residence resets the clock for residency at zero in establishing qualification for the home sale exclusion on the sale of any new home built in its place (Gates, 135 T.C. 1). No portion of the gain on the sale could be excluded under the Code Sec. 121 exclusion since the taxpayers never moved into the new house prior to its sale.

These are just some of the many federal tax developments that occurred over the last three months. Please contact our office if you have any questions about the impact of these, or any other tax recent changes, on your particular situation.

When you experience a change in employment, probably the last thing on your mind is your 401(k) plan distribution. There are a number of options to choose from when determining what to do with your 401(k) when changing employment - from keeping your account with your past employer, taking it with you, cashing out, or rolling the amounts over into a different account. However, mishandling this transaction can have detrimental tax effects, so make sure that you understand all aspects of the distribution options available to you and act accordingly before you walk out the door.

When you experience a change in employment, probably the last thing on your mind is your 401(k) plan distribution. There are a number of options to choose from when determining what to do with your 401(k) when changing employment - from keeping your account with your past employer, taking it with you, cashing out, or rolling the amounts over into a different account. However, mishandling this transaction can have detrimental tax effects, so make sure that you understand all aspects of the distribution options available to you and act accordingly before you walk out the door.

Often, individuals leave their 401(k) plans with their past employer because of confusion about the options. Generally, there are five moves departing employees can make regarding their 401(k) plans:

Take the cash. Cashing out of a 401(k) plan is rarely a wise decision. Although leaving your job with a nice roll of cash in your pocket sounds tempting (especially if you don't have another job lined up and are short on cash), this decision comes at a very high price. If you cash out of your plan, your current employer is required to withhold 20 percent of the amount for federal income taxes, on top of any state income tax withholding that will be required. Moreover, you face federal income taxes on the distribution (as well as any state income taxes) and a 10 percent penalty tax on the distributed amount if you are under the age of 59 and 1/2 at the time of the distribution. In total, these taxes could eat up over half of your distribution. Additionally, when you cash out of your plan you lose out on the opportunity for continued tax-deferral and tax-compounding of the amount in your account.

Roll your funds over into an IRA. An IRA rollover is probably the most popular option for handling a distribution upon a change of employment due to the high level of flexibility and control that the taxpayer has over the funds. With an IRA rollover, you have the ability to take your time to consider the other options such as taking the distribution in cash or investing the funds in your new employer's qualified plan. You also have a great amount of flexibility as to how the funds are invested.

Keep in mind, however, that only pre-tax contributions and earnings accumulated in your current 401(k) plan will be eligible for rollover into an IRA. After-tax contributions, distributions of substantially equal periodic payments, and minimum required distributions are not eligible for rollover into the IRA.

Important note: The transfer of funds between your former employer's plan and your IRA rollover account must qualify as a direct, or "trustee-to-trustee", rollover to avoid the 20 percent withholding requirement. When you receive the distribution check (it will be in the name of the IRA trustee), you have 60 days to deposit it into your IRA account to qualify for rollover treatment.

Invest in your new employer's plan. You may be able to roll your 401(k) account from your past employer into a plan maintained by your new employer. Although your new employer is not required to accept your 401(k) rollover, most do. Thus, your new employer may allow you to invest your 401(k) distribution in the new company's qualified retirement plan. However, only pre-tax contributions and earnings accumulated in your current 401(k) plan will be eligible for this type of rollover. After-tax contributions, distributions of substantially equal periodic payments, and minimum required distributions are not eligible for rollover into the new plan.

Note. The transfer of funds between your former employer and your new employer must qualify as a direct, or "trustee-to-trustee", rollover to avoid the 20% withholding requirement. When you receive the distribution check (it will be in the name of the new employer's plan trustee), your new employer must deposit it into the new company's plan within 60 days to qualify for rollover treatment.

Keep your funds in your current plan. If you have been satisfied with your company's plan performance in the past, have significant after-tax moneys in the fund, and/or you just don't want to make a decision on your distribution at this time, you may have the option of leaving your 401(k) funds where they are with your previous employer. Keep in mind that this option is not a given and is at the discretion of your former employer. For example, employers may not permit departing employees to remain in their 401(k) if the account value is less than $5,000, since maintaining accounts with small values creates administrative burdens. Generally, former employees are also not allowed to add to the account maintained with the past employer and can not borrow against the funds in the 401(k).

One important thing to consider here though is whether keeping your funds with your former employer will limit distribution or access options since you are no longer an employee of the company. Contact your company's benefits department to determine if there are any restrictions that you should know about.

Roll over your 401(k) into a Roth account. Beginning in 2010, all individuals, regardless of income or filing status, can roll over a 401(k) into a Roth IRA. Prior to 2010, eligibility for rolling over a 401(k) into a Roth IRA was limited to individuals with adjusted gross incomes that did not exceed $100,000. This move may be a beneficial if you expect to be in a higher tax rate bracket in retirement than you are now, since qualified distributions from a Roth IRA are tax-free. However, you will pay tax on the amount rolled over into the Roth IRA. If you roll over your 401(k) into a Roth account in 2010, you can elect to recognize the amount subject to tax ratably in 2011 and 2012. However, talk with your financial or tax advisor about this and other options, since as of now, the individual income tax rate brackets are scheduled to rise beginning in 2011 as the lower Bush-era tax rates sunset on December 31, 2010.

Since the distribution of funds from any retirement account can have serious tax consequences, when faced with a change of employment that may result in a distribution of any such funds, please contact the office for additional advice and guidance before you choose a distribution option.

The 2010 Small Business Jobs Act retroactively extended 50 percent additional first-year bonus depreciation for the 2010 tax year. Under the Small Business Jobs Act, all businesses, large or small, can immediately depreciate an additional 50-percent of the cost of certain qualifying property purchased and placed in service in 2010, from computer software to plants and equipment. Moreover, the 50-percent bonus depreciation allowance can be taken together with any Code Sec. 179 expensing, which was also extended (and enhanced) through 2011.

The 2010 Small Business Jobs Act retroactively extended 50-percent additional first-year bonus depreciation for the 2010 tax year. Under the Small Business Jobs Act, all businesses, large or small, can immediately depreciate an additional 50-percent of the cost of certain qualifying property purchased and placed in service in 2010, from computer software to plants and equipment. Moreover, the 50-percent bonus depreciation allowance can be taken together with any Code Sec. 179 expensing, which was also extended (and enhanced) through 2011.

Note. The Small Business Jobs Act increased the maximum deduction for Code Sec. 179 expensing to $500,000 and the investment limit to $2 million for tax years beginning in 2010 and 2011.

Bonus basics

The 2010 Small Business Jobs Act allows all businesses to take a bonus first-year depreciation deduction of 50-percent of the adjusted basis of qualified property purchased and placed in service for use in your trade or business after December 31, 2009, and generally before January 1, 2011. Bonus depreciation is allowed only for: (1) tangible property to which MACRS applies that has an applicable recovery period of 20 years or less, (2) water utility property, (3) certain computer software, and (4) qualified leasehold improvement property. It is not allowed for intangible property, with the exception of certain computer software.

Bonus depreciation can be claimed for both regular and alternative minimum tax (AMT) liability. It is also important to note that, since bonus depreciation is treated as a depreciation deduction, it is subject to recapture as ordinary income under certain provisions of the Internal Revenue Code. And if you have a tax year that is less than 12 months, the amount of the bonus depreciation allowance is not affected by a short tax year.

Computing your bonus depreciation

To figure your allowable 50-percent bonus depreciation deduction, you must multiply the unadjusted depreciable basis of the property by 50-percent. This is the amount of additional first-year depreciation you can deduct in 2010. For example, you purchase qualifying property for your business in 2010 that costs $150,000. You are allowed an additional first-year depreciation deduction of $75,000.

Note. The "unadjusted depreciable basis" is the property's cost (including amounts you paid in cash, debt obligations, or other property or services, plus any amounts you paid for items such as sales tax, freight charges, installation, or testing fees).

Regular depreciation

After you have computed the 50-percent bonus depreciation allowance for the property, you can use the remaining cost to compute your regular MACRS depreciation for 2010 and subsequent years. Under MACRS, the cost or other basis of an asset is generally recovered over a specific recovery period. In this case, the property must have a recovery period of 20 years or less.

Example. Assume that in 2010 a taxpayer purchases new depreciable property and places it in service. The property's cost is $1,000 and it is 5 year property subject to the half-year convention. The amount of additional first-year depreciation allowed under the provision is $500. The remaining $500 of the cost of the property is deductible under the rules applicable to 5 year property. Thus, 20 percent, or $100, is apportioned to 2010, which computes to an additional $50 regular depreciation deduction in 2010 under the half-year convention. Accordingly, the total depreciation deduction with respect to the property for 2010 is $550. The remaining $450 cost of the property is recovered under otherwise applicable rules for computing depreciation in subsequent years.

Code Sec. 179 expensing

The 50-percent bonus depreciation allowance is taken after any Code Sec. 179 expense deduction and before you compute regular depreciation under MACRS rules. Therefore, the cost (basis) of the property must be reduced by the amount of any Code Sec. 179 expense allowance claimed on the property before computing the 50-percent bonus depreciation allowance (multiplying the property's basis by 50-percent). Regular depreciation under MACRS is then computed after you have reduced the basis by any Code Sec. 179 expensing allowance and the 50-percent bonus depreciation allowance.

Example. On April 14, 2010, Tom bought and placed in service in his business qualified tangible property that cost $1 million. He did not elect to claim the Code Sec. 179 expensing deduction and he claims no other credits or deductions related to the property. He may deduct 50-percent of the cost ($500,000) for purposes of 2010 bonus depreciation. He will use the remaining $500,000 of the property's cost to figure his regular MACRS depreciation deduction for 2010 and the years thereafter.

Example. The facts are the same as above, except Tom uses the Code Sec. 179 expensing deduction. On April 14, 2010, Tom bought and placed in service in his business qualified tangible property that cost $750,000. He elects to deduct $250,000 of the property's cost as a Code Sec. 179 deduction. Tom will apply the 50-percent bonus depreciation allowance to $500,000 ($750,000 - $250,000), which is the cost of the property after subtracting the section 179 expensing deduction. Tom will then deduct 50-percent of the cost after section 179 expensing ($250,000) for purposes of 2010 bonus depreciation. He will use the remaining $250,000 of the property's cost to figure his regular MACRS depreciation deduction for 2010 and the years thereafter.

Computing bonus depreciation can be a complicated process, as many variables may come into play. Our tax professionals can help determine the best way for your business to utilize the new bonus depreciation allowance together with other tax incentives to achieve significant tax savings.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of November 2010.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of November 2010.

November 3

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 27-29.

November 5

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 30-November 2.

November 10

Employees who work for tips. Employees who received $20 or more in tips during October must report them to their employer using Form 4070.

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 3-5.

November 15

Monthly depositors. Monthly depositors must deposit employment taxes for payments in October.

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 6-9.

November 17

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 10-12.

November 19

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 13-16.

November 24

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 17-19.

November 29

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 20-23.