The decision to purchase new equipment is always a result of many factors. Manufacturing needs, market temperature, customer demand, equipment price, material price and the thickness of a company's wallet all must be within a company's desired range before a check is written for, say, that new punch press or that high-tech waterjet system.
One thing helping companies make that decision this year is the Economic Stimulus Act and its depreciation bonus, which allows businesses that purchase new equipment in 2008 to trim their tax bill.
The basics of depreciation
According to the IRS, depreciation is a tax deduction that allows companies to recover costs for certain tangible properties over the course of the property's useful life as wear and tear, deterioration and obsolescence set in.
The deprecation bonus allows companies buying new equipment in 2008 to depreciate 50 percent of the equipment's cost in the first year, plus the percentage of the remaining basis in the equipment that would regularly be depreciable. In other words, a company is able to expense a greater percentage of new equipment value this year. Of course, the more a company depreciates now with a piece of equipment, the less it can in the future, meaning future tax bills will be higher.
"You ultimately will reap what you sow here," says Christian Klein, vice president of government affairs and Washington counsel for Associated Equipment Distributors, the organization that manages the depreciation bonus resource Web site DepreciationBonus.org. "You're still only eligible to depreciate 100 percent of the cost of the equipment, so in the other years you'll likely be able to depreciate less because you've taken this depreciation upfront. It's a nuance, but we want to make sure people really understand what's going on here. It's not an additional 50 percent of the cost of the equipment that depreciates, so you can't depreciate 150 percent of the cost. You're still only eligible to depreciate 100 percent, you can just do more of it more quickly in the first year. And that helps if you're having a good year this year. It can reduce your 2008 tax liability."
Restrictions for eligibility for the bonus include only new equipment; only equipment with a recovery period of 20 years or less; equipment that has gone into original use after Dec. 31, 2007; and equipment purchased and put into service between Dec. 31, 2007, and Jan. 1, 2009.
Along with the depreciation bonus, the Economic Stimulus Act has increased expensing limits for businesses under Section 179 for the 2008 tax year. Companies can expense as much as $250,000 as long as their total purchases don't exceed $800,000. If they do, for each dollar spent over $800,000, the corresponding, eligible expensing amount drops by $1. This means a company that spends $1.05 million on equipment loses any advantage of Section 179. For certain companies, the combination of the depreciation bonus and Section 179 could mean bigger savings.
"If you want to try and combine the two, the way you would do that is buy up to $800,000 worth of stuff, take the Section 179 expensing on the first $250,000 and use the depreciation bonus for the remaining $550,000," says Klein.
Ultimately, a company must decide where it wants its money to be held. By taking advantage of the depreciation bonus and Section 179, a company will have more money in its wallet now and be able to invest in itself as it sees fit, but it will give more to the government later. Because of this, Klein stresses that the depreciation bonus is really beneficial only to companies that have had strong years and are thinking of investing in new equipment.
"I look at it as the thing that will nudge people off the fence," says Klein. "If there's a need to buy new equipment, a company might say 'Why not buy now and take advantage of this and get a little bit of a tax break?' It goes back to this question of who do you think can do a better job with your money. Would you rather have it now to invest or would you rather have the government hold onto it for a couple of years? That's really what the calculation comes down to. By cutting your tax bill this year, you may have the money to hire additional workers or invest in your company."
For additional information on the depreciation bonus, as well as a calculator to determine potential tax savings, please visit www.depreciationbonus.org. MM