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A Little-Known but Big-Time Tax Break

The government just made it a lot easier to purchase capital equipment this year, but the special tax breaks found in the new $152 billion Economic Stimulus Act won’t last long.

By Gina Mascio, LexJet CFO

You may have heard about the $152 billion Economic Stimulus Act that will provide up to $600 in rebates to individual taxpayers. What you may not know, since it’s most often buried deep in the story or not even mentioned in most press accounts, is the benefit the legislation brings to business, and yours in particular.

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Signed into law in early February, the Economic Stimulus Act of 2008 features two key but largely under-reported provisions that benefit businesses that invest in capital equipment.

The Economic Stimulus Act, which was signed into law in February, provides two key benefits to business owners who invest in capital equipment during 2008. The legislation encourages businesses to expand and create new jobs now, and your business is a prime beneficiary of this tax gift from the federal government.

Purchasing equipment, software, and tangible property in 2008 entitles your business to receive additional tax deductions. It is estimated that this legislation will save businesses approximately $50 billion in near-term taxes by virtue of a temporary change to the tax code. Following are the two under-reported and little-known (until now) provisions that apply to your business:

Section 179: Business owners who purchase capital equipment for use in their business may be able to deduct the total cost of the equipment in a single tax year, rather than depreciating it over a number of years.

 Effective for tax years beginning in 2008, businesses with less than $800,000 in capital equipment purchases may deduct up to $250,000 in new equipment investments if they are placed in service during the tax year (Section 179 deduction).

This represents a significant increase in this benefit. Prior to the enactment of the Economic Stimulus Act, the maximum amount that could be written off during 2008 was $128,000 for companies with less than $510,000 total capital equipment investments for the year.

For example, Canon's 60-in. printer, the iPF9100, is purchased and placed in service during 2008. Using Section 179 and assuming a 35 percent tax bracket, the net tax savings on the equipment is calculated as follows:

Equipment cost $14,995
First year write-off (Section 179) $14,995

Tax savings of first year deduction

(assuming a 35% tax rate)

$ 5,248
Equipment cost, net of tax savings $ 9,747

On the other hand, let's say you're getting a lot of requests for commercial and corporate work that doesn't require exacting photographic reproduction, but will see the need for speed and greater effiiciency. So, you purchase HP's 60-in. Designjet Z6100. Using Section 179 and assuming a 35 percent tax bracket, the net tax savings on the equipment is calculated as follows:

Equipment cost $18,500
First year write-off (Section 179) $18,500

Tax savings of first year deduction

(assuming a 35% tax rate)

$ 6,475
Equipment cost, net of tax savings $12,025
HP Z6100

The property which qualifies for this deduction is tangible personal property used in the active conduct of your trade or business. It does not include buildings and their structural components or property held for investment. There are limitations that apply if your total capital expenditures exceed $800,000 for the year. Also, the total cost you can deduct is limited to your taxable income from the business.

 

If you want to lease the equipment, you may still be able to take advantage of Section 179 provided that the lease is a capital lease. Examples of capital leases include $1 Buyout, 10% Purchase Upon Termination (PUT), and Security Deposit equals Buyout (SD=BO) leases.

Bonus Depreciation: This provision allows for an additional first-year depreciation deduction equal to 50 percent of the adjusted basis of the qualified property.

The interaction of the additional first-year depreciation allowance with the normally applicable deprecation allowance may be illustrated as follows… Assume you purchase new equipment with a cost of $1,000 during 2008, depreciable over a five-year period. The amount of additional first-year depreciation allowed under the Economic Stimulus Act is $500. The remaining $500 of the cost is deductible under the normal depreciation rules.

Thus 20 percent, or $100, is also allowed as a depreciation deduction in 2008. The total depreciation deduction for 2008 with respect to this property is $600. The remaining $400 is recoverable as depreciation over the next four years. This provision only applies to qualified property placed in service after December 31, 2007, and before January 1, 2009.

You should consult your tax advisor to determine which of these tax planning tips can provide the best benefit for you and your business.

Volume 3  -  No. 3

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