A few temporary changes designed to spur investment in tangible property can dramatically reduce the 2007 or 2008 tax year liability for small businesses. One raises the limit on property that can be written off at once instead of depreciated over time from $128,000 to $250,000. Another allows 50 percent of the cost of eligible property exceeding $250,000 to be written off — and the remaining 50 percent is still eligible for first-year depreciation.

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.

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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.

Contact the New Mexico District SBA office at 505-248-8225 to find a participating lender in SBA’s 7a or 504 loan programs.  Read more about these programs.