Section 179 Deduction is Smart Business, but
Time is of the Essence
Material
handling equipment may be purchased with depreciation advantages under the
new law - but the bonus depreciation expires in 2005
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NOTE: This information is not to be construed as
tax law or tax advice. Consult your tax advisor for comprehensive
details. |
 The 2003
Tax Act quadrupled the amount of machinery and equipment you can purchase
and write off annually from $25,000 to $100,000. The new threshold will be
indexed for inflation in 2004 and 2005?but it reverts to $25,000 in 2006.
Also, if the total acquisitions exceed $500,000, you?re not eligible for
the Section 170 deduction.
If you correctly time fixed asset allocations, you can
take the most possible advantage of the higher thresholds. If new capital
equipment is required and you are not sure about money now, consider
financing to get in under the deadline. The key factor is whether an asset
is installed and functional by December 31 of that year. Simply
issuing a PO during a year does not qualify it -- it must be
up-and-running.
Bonus depreciation also an issue
The 2003 tax law provides for 50% bonus depreciation on
equipment purchased after May 31, 2003 and before January 1, 2005. In
terms of material handling equipment, this only applies to new. Used rack
or conveyor doesn?t qualify.
More Details...
The Jobs and Growth Tax Relief Reconciliation Act of
2003, was signed by President Bush on May 28, 2003. Described below
are major changes affecting businesses and an illustration of possible tax
savings for warehousing and industrial equipment users.
The special first-year depreciation allowance has been
increased from 30% to 50% for qualified property acquired after May 5,
2003 and put into operation by December 31, 2004. Capital equipment such
as conveyors, racks, and automated systems are qualified property eligible
for this additional deduction.
This applies to all businesses regardless of the size of
the company. Here's how it works:
|
Cost of Capital Equipment |
|
$1,000,000.00 |
$1,000,000.00 |
|
Depreciation Allowed |
|
(new law)
$571,000 |
(old law)
$400,000
|
|
Tax Savings |
|
$200,000 |
$140,000 |
(Calculation assumes federal maximum corporate tax rate)
This additional tax savings of $60,000 increases the
first year return on investment from federal tax savings alone from 14% to
20%! Remember this equipment must be put into operation by the end of
the year to qualify.
Small businesses are eligible for an even larger tax
benefit.
If the total amount of qualified property purchased in a
year is less than $400,000, then up to $100,000 of equipment can be
written off in the year it is put into operation. Under the old law this
was limited to $25,000. This great benefit is available for 2003, 2004,
and 2005. Here's an illustration.
|
Cost of Capital Equipment |
|
$200,000 |
$1,000,000.00 |
|
Depreciation Allowed |
|
(new law)
$157,000 |
(old law)
$95,000 |
|
Tax Savings |
|
$55,000 |
$32,000 |
(Calculation assumes federal maximum corporate tax rate)
Here the small business gains $23,000 in additional tax
savings and the rate of return goes from 16% up to 28% for the first year.
For more information and a summary of the entire law,
log on to the IRS website at
www.irs.gov.
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