SUVs and bonus depreciation

Dear Tax Talk,
In a column last year, you wrote that an SUV can be "new or used" for the purposes of Section 179 deduction. Looking at Chapter 3 of IRS Publication 946, the first paragraph in the "What Is Qualified Property" section states: 1. It is NEW property of one of the following types...." Is this a wrong, outdated publication? Could you please point me to a document stating that preowned (used) property (SUV) can qualify for the Section 179 deduction? Also, there are different references to a bill (bills) in Congress that would limit the tax to $25,000. Do you happen to have information on that? Thank you! -- L.K.

Dear L.K.,
It's always good to have someone looking over your shoulder. But, you have to be careful at what you're looking at. The reference you make is to bonus depreciation and not Section 179 expensing, which is covered in chapter 2 of the publication.

For purposes of Section 179 expensing, the property does not have to be new as stated in my earlier column. For purposes of bonus depreciation the property does have to be new.

Section 179 expensing allows a profitable business to write off the cost of property purchased during the year rather than capitalize and depreciate it over its useful life (generally five or seven years). The deduction is limited to the cost of the property purchased or the profit of the business, with certain adjustments. For example, if the business earned $30,000 during the year and acquired $50,000 in depreciable property, the Section 179 expense deduction would be limited to $30,000. If the business had no profit, there would be no Section 179 deduction.

Bonus depreciation, intended to generate investment in new property (and possibly the creation of new, overseas perhaps, jobs) by businesses is a special increased allowance for property acquired after May 5, 2003, and before Jan. 1, 2005. Bonus depreciation is computed without regard to the profit of the business and can be claimed on any cost that was not written off through Section 179 expensing.

Bonus depreciation is equal to 50 percent of the cost, plus the traditional depreciation allowance. For example, in the prior example, only $30,000 of the $50,000 in equipment additions could be written off through Section 179 expensing due to the income limitation. The $20,000 remaining cost would have to be written off through depreciation. Assuming the property was new and considered five-year property, the 50 percent bonus depreciation would be $10,000, leaving $10,000 subject to the traditional allowance of 20 percent (for five-year property) or an additional $2,000. The remaining $8,000 in cost would be written off over the remaining useful life. The total amount expensed would be $42,000, which is $30,000 Section 179, $10,000 bonus and $2,000 traditional depreciation.

Currently, bonus depreciation is set to expire in 2005 and the limit on Section 179 expensing is set to go back to $25,000 in 2006.