I don’t recommend buying equipment solely for the tax benefits. If you need new equipment for your trade or business, buy it and tax whatever tax savings are available. Generally, you receive, at most, an approximately 35 percent tax savings from fully expensing business asset purchases. The Stimulus Act of 2008, however, provides an expensing tax benefit of which you should be aware.
Thanks to this Act, most small businesses, and even moderate-sized businesses that don’t have huge capital equipment needs may be able to fully expense the cost of machinery, equipment, and certain vehicles purchased during all of tax years beginning in 2008. The full expensing deduction may be claimed regardless of when during the year the assets are placed in service. For example, property placed in service on the last day of the 2008 tax year may be eligible for the full expensing deduction. In addition, the Act increased the amount of the expensing deduction for 2008 to $250,000 and this amount is reduced only when $800,000 of expensing-eligible property is placed in service during the year. These two amounts decline to $133,000 and $530,000 for tax years beginning in 2009 unless the law is changed to further stimulate the economy. Be aware that this deduction is further limited to the trade or business income of the business entity computed before the deduction. In other words, the deduction cannot produce a net operating loss for the business enterprise. This provision does not apply to estates and trusts.
The expensing election is found under section 179 of the Internal Revenue Code. It permits full expensing of qualified purchases up to the stated limits rather than requiring depreciation of those purchases over several years. For unincorporated taxpayers, or taxpayers operating through pass through entities (such as S corporations, partnerships, or limited liability companies taxed as partnerships) there are other benefits. By using the expensing election to lower adjusted gross income, these taxpayers may be able to benefit from itemized deductions or personal exemptions (and other tax benefits) that would otherwise be limited or phased-out because of higher levels of AGI.
The expensing limitations apply at both the entity level and at the taxpayer level. That means, for example, if the sole shareholder of an S corporation receives a $250,000 expensing deduction pass-through from the corporation and he or she also has a $100,000 expensing deduction pass-through deduction from a partnership, he or she may only claim the maximum $250,000 deduction on his or her individual tax return. Any amount of the expensing deduction unused in a given year carries over to future years, subject to the limitations in effect during the carryover year. For these purposes, a husband and wife are treated as one taxpayer.
This favorable provision in the Code is a timing benefit; whether expensed or depreciated, in this year or future years, the full purchase price will result in tax savings. From the standpoint of the time value of money, however, a tax savings generated from qualifying purchases during the remainder of 2008 has more value than tax savings a year or more from now. Therefore, if you are contemplating purchasing business equipment or machinery in the foreseeable future, you may want to determine the benefit of making the acquisition this year, rather than next.
If you have questions concerning the section 179 expensing election, talk to your tax professional or call me at 214.957.3366.
Ronnie
© 2008 Ronnie C. McClure, PhD, CPA
