September 27, 2010

Small Business Jobs and Credit Act of 2010

President Obama signed the Small Business Jobs and Credit Act, which allows businesses to write-off 50 percent of the cost of depreciable property purchased or leased (including software) and placed in service during 2010. This provision is a temporary extension of the bonus depreciation provision included in both the 2008 and 2009 economic stimulus laws. The new law also includes a provision that increases Section 179 expensing for two years by increasing the expense limitation from $250,000 to $500,000 and increasing the dollar-for-dollar phase-out threshold from $800,000 to $2 million for years 2010 and 2011.

We have an easy to use calculator that will help you estimate your potential tax savings. Simply enter in the purchase price of your equipment, and let the calculator take care of the rest.

It is important to note that you may not have to write a big check in 2010 or 2011 to purchase your equipment. You could claim the deductions and simply make small monthly payments to pay for the use of the equipment over time through a properly structured lease. Moreover, the tax savings could be used to make some of the monthly payments thereby reducing the overall cost of ownership.

February 13, 2009

American Recovery and Reinvestment Act of 2009 has officially extended the Section 179 Deduction increases made available in the Economic Stimulus Act of 2008 through December 31, 2009

The Section 179 Deduction has been significantly enhanced by the Economic Stimulus Act of 2008, and now extended an additional year by the American Recovery and Reinvestment Act of 2009, giving businesses an incentive to invest in themselves by purchasing or leasing new equipment.

February 13, 2008

President Bush signed H.R. 5140, otherwise known as the Economic Stimulus Act of 2008. The Economic Stimulus Act immediately grabbed headlines because most Americans would receive a check for $600 from Uncle Sam. While the Economic Stimulus Act was a boon for consumers, there were significant benefits in the Economic Stimulus Act for businesses as well

The specific impact the Economic Stimulus Act has had on the Section 179 deduction is related to the dollar limits of the deduction. The previous dollar limits were a $125,000 limit on the deduction and the total amount of equipment purchased could not exceed $500,000. The Economic Stimulus Act raised these limits significantly. The new deduction limits are $250,000 on the deduction, and the total amount of equipment purchased cannot exceed $800,000.

February 08, 2008

Stimulus Package Offers
Equipment Purchase Incentives to Business

Congress approved a $168 billion bill to boost the economy, paving the way for businesses to write off equipment purchases made this year more quickly.

The following provides insights into the business tax and bonus depreciation provisions:

Business Tax Provisions:

Elective Expensing (Section 179). In lieu of depreciation, small business taxpayers may elect to expense the cost of qualified assets (property) they purchase in the year when the assets are placed in service, within certain limits. Under section 179, small business taxpayers are allowed to expense $125,000 (indexed for inflation), and the phase-out threshold is $500,000 (indexed for inflation). Currently in 2008, the expensing limit is $128,000 and the phase-out threshold is 510,000. The proposal increases the expensing limit to $250,000 and the phase-out to $800,000 for 2008. The proposal is effective for taxable year 2008. This proposal is estimated to cost $900 million in 2008 and $100 million over ten years.

Bonus Depreciation. Generally a trade or business must recover the cost of property over a predetermined period of years. This proposal will allow a trade or business to depreciate an additional 50 percent of the cost of an asset acquired and placed into service in 2008 in that year. The types of property eligible for bonus depreciation will be the same as those included in the previous depreciation packages: (1) tangible property that had a recovery period not exceeding 20 years; (2) purchased computer software; (3) water utility property; and (4) qualified leasehold improvement property. The bonus depreciation will be allowed under the alternative minimum tax (AMT). The proposal is effective for calendar year 2008 beginning after the date of first Committee action. This proposal is estimated to cost $43.9 billion in 2008 and $7.4 billion over ten years.

Section 179 Tax Deductions

Typically, if property for business has a useful life of more than one year, the cost must be spread across several tax years as depreciation with a portion of the cost deducted each year.

But there is a way to immediately receive these income tax benefits in one tax year. The provisions of Internal Revenue Code Section 179 allow a sole proprietor, partnership or corporation to fully expense tangible property in the year it is purchased.

And in 2003, tax-law changes made this option much more appealing by dramatically increasing -- from $25,000 to $100,000 -- the amount that can be written off immediately. Future allowable deductions have been adjusted for inflation.

Eligible property
Property that may be written off in the tax year of purchase, rather than depreciated over the asset's useful life, includes:

Machinery and equipment
Furniture and fixtures
Most storage facilities
Single-purpose agricultural or horticultural structures

Also, the definition of eligible section 179 property was expanded by the 2003 legislative changes to include off-the-shelf computer software. Previously, it had to be written off over three years.

The IRS says ineligible property includes:

Buildings and their structural components
Income-producing property (investment or rental property)
Property held by an estate or trust
Property acquired by gift or inheritance
Property used in a passive activity
Property purchased from related parties
Property used outside of the United States

How and when to use deduction
The Section 179 election is made on an item-by-item basis for eligible property. You don't have to use it on all eligible property bought in that year. The election must be made in the tax year the property is first placed in service.

The Section 179 deduction isn't automatic. Taxpayers who want to take the deduction must elect to do so. You make the election by taking your deduction on Form 4562. When you file this form, attach it to either of the following:

Your original tax return filed for the tax year the property was placed in service, regardless of whether you file it timely.
An amended return filed by the due date, including extensions, for your return for the tax year the property was placed in service.

Make sure you make the election when you file your original income tax return for that year. You can't later amend your return to elect Section 179. The only exception to this is if you amend your return before the actual due date, including extensions, of your original return.

For example, the maximum extended due date to file your return is Oct. 15. You file your return on Sept. 1 and then realize you didn't utilize the Section 179 deduction. You still have until the Oct. 15 deadline to file an amended tax return to claim the deduction.

Maximum Section 179 deduction increased
Congress periodically reviews the amount a taxpayer can claim as the annual Section 179 amount. As part of an economic stimulus and tax-reduction package signed into law in May 2003, the expense limit was hiked to $100,000.

Lawmakers upped the immediate deduction amount in the hopes it would encourage businesses to invest in new equipment sooner. The bigger deduction is available for tax years 2003, 2004, 2005, 2006, 2007, and 2008.

Any amount of property over the maximum deduction must be depreciated.

Limitation on annual amount of property purchased
There also is a limit on the annual total of deductible property. If the cost of qualifying Section 179 property you put into service in a single tax year (2003) now exceeds $400,000 then you can't take the full deduction.

For every dollar above $400,000 that a business owner spends on eligible property, he loses a dollar in deductions. For example, the manufacturer completely re-equipped his facility at a cost of $407,000. This is $7,000 more than allowed, so he must reduce his eligible deductible limit to $93,000: $100,000 minus $7,000.

The limitation amount will be indexed in 2004 through 2008 to reflect the inflation rate.

Deduction limited to taxable income
You have now determined the maximum deduction based on the amount of property purchased during the year. You now must pass the aggregate income hurdle.

Your deduction is limited to your aggregate taxable income from the active conduct of any trade or business. Active trade or business includes employee and spouse's wages, sole proprietorships, partnerships and S corporations. Basically, this means that unless you have other sources of business income, your Section 179 deduction can't create a taxable loss for your business.

More business owners are able to take advantage of the deduction when they combine their company earnings with those of a spouse or money earned in addition to (or before starting) their own company income.

For example, you are someone else's employee for most of the year. Your wages exceed the Section 179 deduction. You start your own business at the end of the year and purchase equipment and furniture. Even if your new business doesn't generate gross income that year, you can still take the Section 179 deduction on the new equipment and furniture. Why? Your wages exceed the Section 179 deduction.

This aspect of inclusion also applies to a spouse. For example, you earn annual wages of $60,000 as an employee. Your spouse doesn't work during the year but begins a new business at the end of the year. Your spouse purchases and places in service $15,000 of Section 179 property at the end of the year. Your spouse's business doesn't generate gross income at the end of the year. Even though your spouse hasn't earned trade or business income for the year, the Section 179 deduction of $15,000 is still allowed in full since your wages count as trade or business income.

Any amounts disallowed by the trade or business taxable income limit are carried over to the next year and added to the cost of any eligible property placed in service in that year. The same rules for maximum deduction, maximum annual investment and taxable income apply to the next tax year as well. .

Conclusion
The tax tip explains the process for using Section 179 to fully expense certain business expenses immediately instead of depreciating them across a period of several years. You should also be aware of less obvious advantages of the Section 179 deduction:

Lowers adjusted gross income, which could help you qualify for various deductions which are limited by AGI.
Lowers earned income, which can increase your earned income credit.
Is allowed in full even if the eligible property is placed in service on the last day of the year.
Companies who choose to acquire assets through a finance lease may depreciate the asset in the same way they would if they had purchased it outright. If delivered this year, the deduction can be made this year with just one month cash outlay.

You should consult with your tax advisors to determine how you can use leasing to take advantage of the Section 179 tax savings this year.

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