Expand Vol. 3 No. 12

Last Call for Big-Time Tax Breaks on Equipment Purchases

Purchasing equipment, software, and tangible property in 2008 entitles your business to receive additional tax deductions, but time is running out as the year ends. It is estimated that economic stimulus legislation that was signed earlier this year, and is due to expire on December 31 will save businesses approximately $50 billion in near-term taxes by virtue of a temporary change to the tax code. Following are the two 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.

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), which is 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.

Qualifying property 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.

For instance, using Section 179 and assuming a 35 percent tax bracket, the net savings on an Epson GS6000 solvent printer for high-volume, high-quality décor and graphics production ($28,995) in first-year deductions is $10,148.25, so the equipment cost net of tax savings is $18,846.75.

For the Legend 72HUV, a hybrid (roll-to-roll and flatbed) industrial UV-curable printing system, the tax savings of the first-year deduction would be $29,748.25 on the $84,995 investment, resulting in a net cost of $55,246.75.

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 normal 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.