Many of us have either already received or are expecting soon our economic stimulus checks from the IRS. Those checks are an important part of the Economic Stimulus Act of 2008, but for small businesses, there are other provisions in the law with the potential for far greater benefit.
The most important thing to remember about the act’s small business benefits is that the special bonus depreciation provision expires at the end of 2008 and the Section 179 expensing provision expires at the end of your business tax year that begins in 2008. Time is definitely of the essence to take advantage of these opportunities.
The act allows far more depreciation deductions on purchases of most types of tangible property and computer software bought this year. These deductions reduce the taxable income of the business or its owners, with the potential to dramatically reduce your 2007 or 2008 business tax year liability.
This means you will recover a far larger portion of the price of property placed in service this year through tax savings than you normally would. Your business will benefit from the additional productivity from the new machinery or equipment, you will benefit from the tax savings, and the economy will benefit from the additional economic activity your investment generates. Talk about have your cake and eat it too!
The additional deductions fall in two categories: Section 179 expensing and a Special Depreciation Allowance. Section 179 of the tax code allows businesses to write off investments in eligible property immediately instead of depreciating it over time.
The normal limit for the Section 179 write-off is $128,000 total for your business tax year, but for eligible property purchased and placed in service in your business tax year beginning in 2008, the limitation is almost doubled to $250,000. The $250,000 deduction amount is reduced only when a business purchases more than $800,000 of eligible property.
The second provision of the act is the Special Depreciation Allowance. This allowance is in addition to the Section 179 write off and allows the business to take depreciation of 50 percent of the cost of the property after taking the 179 expense. Then on the 50 percent that is left, you still get to take your full first year depreciation. To qualify for the Special Depreciation Allowance, the original use of the property must begin with the taxpayer after December 31, 2007. In other words, the property must be “new” property.
For the eligible equipment that you buy before the end of this calendar year and after the beginning of your 2008 tax year, you can get up to three deductions in your 2008 tax year. For example, if you purchase and place into service eligible property that costs you $450,000 on August 1, 2008, and your 2008 business tax year starts July 1, 2008, you can have the 179 expense of $250,000, the Special Depreciation Allowance of 50 percent of the remainder, $100,000 and still take the regular first year depreciation on the remaining $100,000 of basis.
On property with a 5-year tax life, that could mean a write-off of $370,000 in your 2008 business tax year for an investment of $450,000. If you purchase and place into service this same property after December 31, 2008, but still in your 2008 business tax year, you can still take a 179 expense up to a total of $250,000 on all eligible property purchased in your 2008 tax year.
If you want to really leverage the tax savings, the U.S. Small Business Administration’s loan programs are designed to help small businesses grow. Because of the long-term nature of both the 7a and 504 loan programs, your payment on an SBA loan this year could easily be less than the tax savings you receive so you could actually generate cash for your business in 2008 by financing the equipment purchase with an SBA guaranteed loan. Contact your nearest SBA office by visiting www.sba.gov to find a participating lender in SBA’s 7a or 504 loan programs.
The Special Depreciation Allowance also helps with vehicle purchases, increasing the allowable first year depreciation on trucks and vans weighing less than 6,000 pounds to 350 percent of the normal maximum (from $3,160 to $11,160) and on automobiles to 370 percent of the normal maximum (from $2,960 to $10,960).
The Section 179 write-off is only available to companies that purchase less than $800,000 of eligible assets in the tax year and the Section 179 expensing limit for SUVs remains $25,000. Also, since these allowances are deductions from taxable income, they will only benefit companies that have profits to offset.
The SBA provides a Depreciation Calculator, fact sheet, on-line seminar and links to more info on the act at https://www.sba.gov/stimulus/. The Internal Revenues Service provides additional in-depth information about the Act at:
Business Provisions of the Economic Stimulus Act of 2008 https://www.irs.gov/newsroom/article/0,,id=183867,00.html
IRS To Issue Guidance on Special 50-Percent Depreciation Allowance https://www.irs.gov/newsroom/article/0,,id=181364,00.html
2008 Economic Stimulus Act Provides Tax Benefits to Businesses https://www.irs.gov/newsroom/article/0,,id=179227,00.html
Michael Pappas is the Regional Administrator of the U.S. Small Business Administration
