|FORTUNE Small Business:|
Buy equipment now! 2008 tax breaks
The economic stimulus bill increased the amount you can deduct for new equipment purchased this year
(FORTUNE Small Business) -- Dear FSB: I am a small-business owner and in my business I use very specialized machinery. Recently, I heard of a tax break that's available on the purchase of new equipment that uses new technology, but have been unable to find any information related to it. This law sounds like it may be essential to my short-term success and long-term growth. Do you have any idea what this law entails?
- Corder Hudson, Common Cents Vending, Orange, Calif.
Dear Corder: Tax professionals we spoke with were unfamiliar with the tax breaks tied to new technology that you refer to. However, you are dead-on when you talk about a significant new small-business tax break for the purchase of new equipment.
On February 13, President Bush signed H.R. 5140, the Economic Stimulus Act of 2008. The $152 billion stimulus package includes tax rebates for families and individuals. Even more important, it raised the ceiling on the amount that businesses can deduct in a single year, according to Dennis O'Toole, a partner in the accounting firm of Rosen & Associates in Westborough, Massachusetts.
The stimulus package makes a one-time change to Section 179 of the tax code, which lays out how businesses can deduct the cost of purchasing tangible assets such as equipment, furniture, computers and so on. That figure is adjusted for inflation each year and was scheduled to top out at $128,000 in purchases in 2008.
But be careful, O'Toole advised: the higher limits under Section 179 are targeted at small businesses. Companies with more than $800,000 a year in qualifying asset purchases will not see any change in the amount of depreciable expenses they can claim in 2008.
However, companies of all sizes can take advantage of another accounting bone that Congress threw to the private sector: a change to so-called "bonus depreciation" that allows companies to write off 50% of the value of an asset in the first year of the purchase, up from 20%. T
hat change will enable companies to write off more of their purchases more quickly, though the full value of the asset purchase is still depreciated over five years, O'Toole said. For companies claiming the $250,000 deduction in 2008, bonus depreciation would only apply to the amount of qualifying expenses that remain after that one-time deduction is taken. For example: a company with $350,000 in qualifying asset purchases in 2008 will get a dollar-for-dollar tax write-off of the first $250,000 this year. The remaining $100,000 will have to be depreciated over five years, as it would in any other year. However, in 2008 the first $50,000 of that can be counted as a depreciable expense, as well, rather than just the first $20,000.
Taken together, the tax breaks available to small businesses in 2008 represent a powerful incentive to purchase equipment, computers and other qualifying assets this year. Section 179 deductions return to an inflation-adjusted level much closer to $125,000 in 2009.