Boosted Section 179 expensing
Under pre-Act law, taxpayers could expense (i.e., deduct currently, as opposed to taking depreciation deductions over a period of years) up to $128,000 for 2008. This annual expense limit is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during 2008 exceeds $510,000. The amount of the expense deduction is limited to the amount of taxable income from any of the taxpayer's active trades or businesses.
Under the Act, for tax years beginning in 2008, the $128,000 expensing limit is increased to $250,000, and the overall investment limit is increased from $510,000 to $800,000.
As a result of this incentive, most small businesses will be able to obtain a full deduction for the cost of business machinery and equipment purchased in 2008, thereby reducing their effective cost for those assets. What's more, there is no alternative minimum tax (AMT) adjustment with respect to property expensed under Code Sec. 179.
DKW Analysis: Apparently, our Congress members want businesses to spend. Remember, if you are not profitable, spending money on equipment will make no sense. If you are profitable, then 2008 is the year to consider purchasing equipment, assuming such equipment is going to be needed for operations over the next year or two.
Such equipment has to be considered tangible personal property to qualify for the expense election. Generally, this will be property that can be moved relatively easily. If a cost segregation study is performed, you may have the opportunity to claim Section 179 expenses for dealership items that may not initially come to mind.. Such items may include outside light poles and fixtures, vehicle display stands, indoor decorative lighting, special wiring done for specific vehicle service equipment, phone and computer system wiring, etc.
The limits on total qualifying property purchased and the expense limit are tested on a combined basis for companies under common control. Common control will vary based on the specific entity types and ownership structures, but usually will include companies that have 80 percent similar ownership.
Bonus depreciation makes a comeback
Bonus first-year depreciation was first allowed following the terrorist attacks of 2001, but generally isn't available for property acquired after 2004.
The Act provides for bonus (accelerated) depreciation by allowing a first-year depreciation deduction of 50 percent of the adjusted basis of qualified property placed in service after Dec. 31, 2007, and, generally, before Jan. 1, 2009. The basis of the property and the depreciation allowances in the year the property is placed in service and in later years are appropriately adjusted to reflect the additional first-year depreciation deduction. The taxpayer may elect out of additional first-year depreciation for any class of property for any taxable year.
The interaction of the additional first-year depreciation allowance with the otherwise applicable depreciation allowance may be illustrated as follows:
Assume that in 2008 a dealer purchases new depreciable property and places it in service. The property's cost is $1,000 and it is 5-year property subject to the half-year convention. The amount of additional first-year depreciation allowed under the provision is $500. The remaining $500 of the cost of the property is deductible under the rules applicable to 5-year property. Thus, 20 percent, or $100, is also allowed as a depreciation deduction in 2008. Accordingly, the total depreciation deduction with respect to the property for 2008 is $600. The remaining $400 cost of the property is recovered under otherwise-applicable rules for computing depreciation. In other words, qualifying purchased property will have about 60 percent of the cost written off in the first year.
Bonus depreciation is allowed for alternative minimum tax (AMT) purposes as well as for regular tax purposes.
DKW Analysis: Some items that you may not originally think should qualify for this acceleration of depreciation would be items such as landscaping, ‘canned’ computer software, parking lots, and decorative tile or carpeting. Gas stations and car washes should also qualify for such depreciation.
Dealers who are considering leasing facilities and making leasehold improvements to the facilities may also qualify to claim this accelerated write off. Generally, leasehold improvements made to a facility rented to the dealership will not qualify for the accelerated depreciation based on limitations present in the Act.
Automobiles have special rules that generally limit the amounts that may be expensed for Section 179 and bonus depreciation. Details regarding your particular vehicles and situation should be discussed with your tax advisor.
Many thanks to my tax partner Dave Wiggins for contributing to this timely article.
Vol 5, Issue 5