THE ECONOMIC STIMULUS package signed by President Bush includes two significant tax breaks for small-business owners. The provisions, designed to encourage business spending, come in the form of bigger depreciation write-offs:
Expanded Section 179 Deduction : Bigger Section 179 depreciation deductions are allowed for qualifying assets placed in service in tax years beginning in 2008. Under the Section 179 deduction, many small and medium-sized businesses can instantly depreciate most or all of the cost of qualifying new and used assets in the year they are first placed in service. Most depreciable business assets (other than real estate) qualify for the Section 179 deduction — including equipment and most purchased software.
First-Year Bonus Depreciation : Thanks to the new law, 50% first-year bonus depreciation is allowed for qualifying new (not used) assets that are both purchased and placed in service during calendar 2008. This break also covers new (not used) cars and light trucks that are used for business. For certain long-lived new (not used) assets, the placed-in-service deadline is extended to Dec. 31, 2009. Unlike the Section 179 deduction privilege, 50% first-year bonus depreciation is available to even the largest businesses. However, small and medium-sized businesses that can take advantage of both the Section 179 deduction and 50% first-year bonus depreciation are the biggest winners.
Now for the details.
Section 179 Deduction Gets Jacked Up for 2008 Only
The stimulus package almost doubles the maximum Section 179 deduction — but only for tax years beginning in 2008 when the maximum write-off is generally increased to a whopping $250,000 (up from only $128,000 before the new law). For 2009-2010, the maximum deduction will revert back to $125,000 (plus inflation adjustments) unless Congress takes further action.
The threshold at which the deduction phases out also has been raised, which means many more businesses that make deep investments in equipment will now be eligible for the Section 179 deduction. For 2008, a business can buy up to $800,000 worth of qualifying assets before the deduction begins to be reduced (dollar-for-dollar by the amount in excess of that threshold). That’s up from $510,000 before the Stimulus Act. For 2009-2010, however, the phase-out threshold will revert back to only $500,000 (plus inflation adjustments) unless Congress takes further action.
Example 1 : Say your small business adds $200,000 worth of new and used equipment and software during its 2008 tax year. Under the expanded Section 179 deduction break, you can write off the entire $200,000 on your 2008 business tax return or form, as long as the business still has positive taxable income after subtracting the Section 179 deduction. Before the Stimulus Act, your Section 179 deduction would have been limited to only $128,000.
Example 2 : Say your medium-sized corporation adds $825,000 worth of new and used equipment and software during its 2008 tax year. Under the liberalized Section 179 deduction rules for 2008, your company can write off $225,000 on this year’s tax return ($250,000 maximum Section 179 deduction reduced by the $25,000 excess over the $800,000 phase-out threshold). Before the new law, your company would have been ineligible for any Section 179 deduction due to the phase-out rule.
First-Year Bonus Depreciation Is Back
You may remember 50% first-year bonus depreciation from a few years ago. Thanks to the stimulus package, it’s back for a return engagement — but only for new (not used) qualifying assets that are both acquired and placed in service during calendar year 2008. However, the placed-in-service deadline is extended through Dec. 31, 2009, for certain long-lived assets.