Business Buy Some Capital Assets
Apr 01, 2009
During the recent Presidential campaign, pundits charged that the Democratic candidate would increase taxes on the business community. One of the ways that taxes would be increased was the elimination of the bonus depreciation (IRC section 179) rules. As it turns out, the Congress and President Obama, as part of the recently passed Stimulus Package, further liberalized these rules.
In 2007, the maximum bonus depreciation was $125,000. For 2008, this amount has been increased to $250,000. What does this mean for the business community? If a business spends the maximum allowance, for a qualified asset, the tax savings will be $87,500 in the year of purchase or 35% of the purchase price. Think about the implication of this benefit. The Federal Government is writing a check to any business that spends its capital on fixed assets equal to 35% of the purchase. It's like going to a department store and buying a $50.00 shirt for $32.50. I'd purchase a whole bunch of $50.00s shirts for $32.50.
What is Section 179 property? It is property that you acquire by purchase for use in the active conduct of your trade or business. In English, if you purchase a machine for your business, and it costs less than $800,000, you can write off (expense) the first $250,000. The balance would qualify for normal depreciation.
Why did the government liberalize these rules? It's simple, to spur the economy. One was that the government uses tax legislation, is to affect the United States economy. In 1980, then President Ronald Regan asked the Congress to spur the economy. What did the Congress do? It liberalized depreciation rules, specifically, real property deprecation. Prior to the change, real property was depreciated over 30 years. Once the Congress did its thing, real property depreciation was 15 years until 1986. Real Estate developers began developing commercial property with a passion because they knew that they would recoup their investment in 15 years. Banks were willing to place mortgages on these commercial properties because, when everything else was equal, the developers would reduce their Federal Income Tax expense, providing free cash to repay the mortgages. Businesses purchased land and built corporate offices. The list of those taking advantage was huge. The change in the tax law did what was intended, to spur the economy.
There are some rules that businesses need to follow. For example, you cannot deduct more than your net taxable income as bonus depreciation. Certain types of assets do not qualify. You should discuss these issues with your tax accountant, or you can discuss it with your part time B2B CFO who has a keen knowledge of the requirements of Section 179 depreciation. Your B2B CFO can provide you with the knowledge base to make certain strategic decisions to take advantage of the change in the tax law.
Feel free to visit the B2B CFO website at www.b2bcfo.com.
