For businesses that purchase equipment including software during 2009, the IRS is allowing a special one time onetime only accelerated deduction of up to $250,000. There are some important issues to know if you decide to take this deduction.
Standard Section 179 Deduction: In prior years and again in 2010, the section 179 accelerated deduction was limited to about $135,000 depending on the year. As a way of stimulating more businesses to make capital purchases this year, the IRS is allowing complete depreciation up to $250,000 this year.
What kind of equipment and capital expenditures is covered: Equipment purchased (not leased), software, and new or used equipment that is put to use in 2009 qualifies. You should verify the precise details with your CPA.
Calendar Year vs. Fiscal Year Taxpayers: If you are a calendar year taxpayer the large deduction ends on 12/31/2009. If you are a fiscal year taxpayer, qualifying deductions end on the last day of your 2009 fiscal year. As with all matters congress approves, there is a small chance that this deduction could be extended past 2009, but don’t count on it.
The Fine Print: Only purchased equipment and software is. Leased equipment is not covered. The manner in which the deduction affects your business depends on a number of factors, including the type of company you are. For “C” corporations any tax liability is reduced by the amount of the increased section 179 deduction only up to $250,000 in taxable income. So if you only have $125,000 in taxable income, your deduction can only be $125,000. If your corporation shows no taxable income for the year, there is no deduction possible.
“S” corporations, LLCs, and sole proprietorships are treated differently. Because profits and losses are passed from the company to its shareholders, there are several rules that affect shareholders. For example, the maximum amount of deduction a shareholder in an “S” corporation may take regardless of how many companies they own that buy new equipment is $250,000 per shareholder. There are a few other tricky rules that may limit the deduction. As always, you should consult a CPA that is intimately familiar with the rules regarding this special deduction.
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
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