NEW YORK - The economic stimulus package that became law earlier this month contains two provisions aimed at helping small businesses increase their capital spending - a huge increase in the Section 179 tax deduction and a bonus depreciation allowance.
The Section 179 deduction, which allows small businesses to deduct up front rather than depreciate over time the cost of certain kinds of equipment, has nearly doubled for 2008, rising to $250,000 from a previously planned $128,000. The bonus depreciation provision allows businesses of any size to depreciate 50 percent of the cost of equipment, with the balance to be depreciated according to IRS rules.
It's possible for a company to take advantage of both provisions, which could mean a huge tax savings for 2008.
The Section 179 deduction is limited to companies that buy less than $800,000 in capital equipment during the year; that ceiling is the government's way of restricting the deduction to small businesses.
It's a pretty easy deduction to take, but there are a few pitfalls to look out for.
Foremost, according to tax attorney Barbara Weltman, is that a business can't use the Section 179 deduction if it's operating at a loss. "You don't get a benefit unless you're profitable," she said.
A business might be able to carry forward some of the costs of the equipment into future years, and in the process still benefit from the deduction. However, there's no way to know now whether the Section 179 deduction will be as lucrative in future years as it is this year.
Another caveat: Not all kinds of equipment can be deducted under Section 179. Typically, computers, vehicles, manufacturing equipment and office furniture qualify for the deduction. Air conditioning or heating units, or structural parts of a building like replacement windows, cannot be deducted under Section 179 - but they can be deducted under depreciation rules.
Keep in mind that the $250,000 figure is an aggregate - you can buy any number of pieces of equipment to take the deduction, but once you go above that amount, depreciation sets in.
Equipment must be bought - but not necessarily paid for - and placed into service by Dec. 31 to qualify for the deduction. So the PC you put on your charge card in December needs to be in use by the end of the year, even though the bill won't arrive until January.
It's possible to take a Section 179 deduction for equipment that's used partly for business - for example, a car - but more than half its usage must be for company purposes. Weltman noted that the equipment must actually be bought for the business and cannot be something that was just converted later to company use. So if you've just created a home office and are using the computer you bought two years ago, the computer cannot be deducted under Section 179.
To take advantage of the Section 179 deduction, a business must expressly elect to take it on IRS Form 4562, Depreciation and Amortization. More information about the deduction can be found in IRS Publication 946, How To Depreciate Property. It can be downloaded from the IRS Web site at www.irs.gov/pub/irs-pdf/p946.pdf.
The bonus depreciation measure gives business owners a more generous than usual first-year deduction for capital equipment. The bonus generally applies to equipment that falls under the umbrella of the Modified Accelerated Cost Recovery System, the tax code's method for depreciating property over a period of years. Under MACRS, assets are depreciated according to a timetable the government has set up to estimate the value of various classes of property.
Details of these classes and the depreciation timetables for them can also be found in IRS Publication 946.
Depreciation can look a little daunting to business owners who have never done it before, but Weltman noted that tax preparation programs can be a big help, doing the computing for you while also helping you to determine which class your property falls under. Another alternative is to seek the help of a tax professional.
Businesses can use both of these tax breaks, taking a Section 179 deduction for the first $250,000 in equipment bought this year, and then using the 50 percent bonus depreciation on the rest.