While individual tax rebates got the most attention with passage of the Economic Stimulus Act of 2008 earlier this year, the bill contained many provisions with far greater benefit for small businesses. These provisions are important because small businesses drive our economy.
With far more deductions for business-related property purchased this year than the law normally allows, businesses stand to recover a far larger portion of the price of the property placed in service this year through tax savings than they normally would.
Section 179 of the tax code allows businesses to write off investments in eligible property immediately instead of depreciating it over time. Under the Stimulus Act, a business can deduct from its taxable income up to $250,000 of property placed in service in the 2008 business tax year — a deduction that’s reduced if the business buys more than $800,000 of eligible property in that time (the previous maximum was $510,000). To qualify for these write-offs and allowances, the property must be new and come into use after Dec. 31, 2007.
Under the special depreciation allowance, a business can then deduct 50 percent of the cost of property beyond the $250,000 limit and still claim first-year depreciation on the remaining 50 percent — for a total of three deductions.
For example, if a business whose tax year begins July 1, 2008, buys and places into service $450,000 worth of eligible property on Aug. 1, 2008, it can claim the Section 179 expense for the first $250,000, apply the special depreciation allowance to half of the $200,000 balance for another $100,000 write-off and take the regular first-year depreciation on the remaining $100,000. On property with a five-year tax life, that could mean a write-off of $370,000 in the 2008 business tax year for an investment of $450,000!
If the business purchases and begins using this same property after Dec. 31, 2008, but still in its 2008 business tax year, it can claim a Section 179 expense up to $250,000, but the special bonus depreciation provision expires at the end of 2008.
The special depreciation allowance also helps with vehicle purchases, increasing the allowable first-year depreciation on trucks and vans weighing less than 6,000 pounds to 350 percent of the normal maximum (from $3,160 to $11,160) and on automobiles to 370 percent of the normal maximum (from $2,960 to $10,960). The Section 179 expensing limit for SUVs remains $25,000.
Because these allowances are deductions from taxable income, they only benefit companies that have profits to offset. You should consult your tax advisor before making any decisions based on the 2008 Economic Stimulus Act.
Earning by borrowing
One way for businesses to maximize their tax savings is to finance the purchase of equipment with a loan guaranteed by the Small Business Administration. Because of the long-term nature of both the 7a and 504 loan programs, the potential tax benefits and income generated by purchasing the equipment with an SBA loan taken out this year more than compensate for money spent on loan payments.