The new economic stimulus law signed by the president on Feb. 17—the American Recovery and Reinvestment Act of 2009—gives small business owners a second chance at a “one-time” tax-saving opportunity.
Strategy: Buy assets like equipment and computers needed for your business. The new law revives the enhanced Section 179 deduction and “bonus depreciation” tax breaks that officially expired after 2008.
These two tax goodies can be combined so that your small business can write off most, if not all, of the cost of new assets placed in service this year.
Unbelievable as it may sound, new IRS rules now offer owners and managers of closely held businesses tax savings so large they may seem incredible. So great is the surprise tax windfall, in fact, that your tax savings could actually equal your main source of income.
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Here’s a quick review of this unique one-two tax punch.
1. Section 179 deduction: Under Section 179 of the tax code, a business can currently deduct the cost of assets placed in service during the year up to a maximum amount. The deduction phases out for purchases above a specified threshold. A 2008 law doubled the maximum deduction to $250,000, with an $800,000 threshold (up from $500,000), for assets placed in service in tax years beginning 2008. Now the new law extends the higher amounts for another year to cover tax years beginning 2009.
2. Bonus depreciation: The new law also extends 50% bonus depreciation for qualified assets placed in service in 2009. Unlike Section 179, this tax break applies only to new assets included in the following categories:
- Property with a cost recovery period of 20 years or less
- Depreciable software that is not amortizable over 15 years
- Qualified leasehold improvements
- Water utility property
The deadline for the bonus depreciation break is extended to assets placed in service by Dec. 31, 2010, for qualifying property with a cost recovery period of 10 years or longer, certain transportation equipment and aircraft.
To top things off, any remaining balance left after claiming the Section 179 deduction and bonus depreciation can be written off over time under the regular depreciation rules. Claim deductions in this order: Section 179 first; bonus depreciation second; and regular depreciation last.
Example: Your business buys new machinery (seven-year property) in 2009 costing $300,000. For simplicity, we’ll assume you don’t buy any other business assets this year. Here’s how it breaks down in three steps:
1. Your business deducts $250,000 under Section 179. The balance is $50,000.
2. Your business claims 50% bonus depreciation on the $50,000 balance for a deduction of $25,000. The balance is $25,000.
3. Your business claims a regular first-year regular depreciation deduction of $3,573 (14.29% of $25,000) under the depreciation table for seven-year property.
By taking full advantage of the available depreciation tax breaks in 2009, your business can write off a staggering $278,573 ($250,000 + $25,000 + $3,573) of the $300,000 cost!
Tip: Special rules apply to deductions for vehicles used in your business (see below).
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Drive through a big tax loophole
The IRS imposes separate limits on depreciation deductions for “luxury cars.” For instance, the maximum first-year deduction for a car placed in service in 2008 was $2,960. (New limits for 2009, including bonus depreciation, will be released shortly.) This figure must be adjusted based on percentage of business use.
Exception: Under a special tax-law provision, you can deduct up to $25,000 of the cost of a vehicle weighing more than 6,000 pounds, like certain heavy-duty SUVs.
Strategy: If your business needs such a vehicle, buy it this year. But check to make sure it exceeds the weight limit.
Let’s say you purchase a new (not used) heavy-duty SUV in 2009 for $50,000. If you use it 80% for business driving, the depreciable basis is $40,000 (80% of $50,000). Here’s the first-year depreciation story:
- Section 179 deduction of $25,000
- Bonus depreciation deduction of $7,500 (50% of $15,000 balance)
- Regular depreciation deduction of $1,500 (20% of $7,500 balance)
Thus, your total write-off for 2009 is $34,000. You can deduct the $6,000 remaining depreciable balance under the regular depreciation rules.
Tip: Congress has threatened to eliminate this tax break, but it’s still intact for now.
By staking your claim now, without delay, you can take your share of the tax-saving windfall — starting this year.
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