Understanding the New Depreciation Deduction
By: Charles L. Telk Jr., CPA, Senior Tax Advisor | email
The Economic Stimulus Act of 2008 includes two valuable changes that allow much faster depreciation deductions for business assets.
In the current slowing economy, businesses may be reluctant to invest in new equipment and vehicles. But the new tax breaks, along with current low interest rates, provide a golden opportunity for financially healthy manufacturers to add or replace business assets. If your company is paying high federal income taxes, these deductions might result in Uncle Sam helping to foot the bill.
However, there are some important considerations to take into account so your company can make informed decisions about the best time to buy equipment, software, vehicles and other assets.
1. The Expanded Section 179 Deduction. Thanks to the Economic Stimulus Act, larger Section 179 depreciation deductions are allowed for qualifying new or used assets placed in service in tax years beginning in 2008.
Specifically, the new law almost doubled the maximum deduction to $250,000. For 2009 to 2010, however, the maximum deduction will revert back to $125,000 (plus inflation adjustments) unless Congress takes further action.
2. First-Year Bonus Depreciation. You may remember the 50 percent first-year bonus deprecation from a few years ago. Under the Economic Stimulus Act, it’s back – but only for new qualifying assets that are acquired and placed in service during calendar year 2008.
The new law has created a tax-saving opportunity for businesses that are able to take advantage of both the Section 179 deduction and 50 percent first-year bonus depreciation. These two breaks can be combined to offset a big chunk of a company’s taxable income for the year.
Here are five considerations that may come into play with the depreciation deductions:
1. The impact of lower write-offs in future years.
2. Cash flow implications.
3. The section 179 phase-out rule for larger businesses.
4. The section 179 income limit and the impact of pass-through entities.
5. State rules.
Conclusion: There’s no doubt that the new tax breaks provide a golden opportunity for financially healthy businesses that are paying high current income taxes. However, each business is unique and it is important to examine all the tax angles.
Please contact us for further explanation on how these five considerations can affect how you should file your taxes.
