Tax Law Increases Depreciation, Expensing
Federal law provides several new tax benefits for businesses
Date Posted: 12/1/2003
The federal tax law enacted earlier this year provides several new tax benefits for businesses related to capital investments in machinery and equipment.
The Jobs and Growth Tax Relief Reconciliation Act of 2003, passed by Congress and signed into law by President Bush in May, increases from 30% to 50% the bonus depreciation deduction that was established in 2002.
The 50% bonus depreciation applies to property acquired after May 5 and before
The definition of qualifying property has not changed. Qualifying property must be brand new and with a class life of 20 years or less. (The new law also increases the bonus depreciation amount that may be taken for passenger automobiles from $4,600 to $7,650.) The additional first year depreciation is not available on used machinery or equipment, although major repairs or reconditioning of machines that are capitalized would qualify for the additional first year depreciation.
The 50% bonus depreciation can have a significant impact on a company’s depreciation deduction. Businesses may enjoy a 60% tax write-off in the first year of a new piece of equipment.
In addition, the new tax law dramatically increases expensing. In lieu of depreciation, businesses previously could immediately deduct under IRS Code Section 179 – rather than depreciate – up to $25,000 in qualified property placed in service for the year. The new tax law increased expensing to $100,000 and increased the phase-out threshold from $200,000 to $400,000. The phase-out threshold means that the Section 179 deduction applies only to businesses that acquire no more than $400,000 of equipment during the year.
Also, off-the-shelf computer software is eligible for expensing – it previously was ineligible.
Property placed into service in tax years beginning in 2003, 2004 and 2005 will be eligible for the special treatment. For 2004 and 2005, the amounts will be indexed for inflation.
The new law allows businesses to make or revoke a Section 179 expense election without first obtaining IRS consent.
Businesses should confer with their tax advisor to determine how these tax saving opportunities may apply to their specific circumstances.
The benefits of machinery and automated equipment in pallet and sawmill operations are well known. Machinery and equipment can increase production while at the same time controlling or reducing labor and associated costs.
Although the economy shows signs of recovering from the downturn of recent years, the slowdown affected machinery suppliers just as it did pallet and sawmill companies. In this climate, it is a good time to negotiate for the purchase of new machinery and equipment.
The latest advantages offered under the new tax law make it even more attractive to consider capital investments in new machinery and equipment.
As with any business investment decision, owners and managers should carefully scrutinize the requirements and needs of their specific operations, compare various machines and suppliers, analyze their return on investment, and other factors.
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