How can capital expenditures provide tax benefits to businesses?
One way is through ‘bonus depreciation.’ Businesses are able to write off half the cost of new equipment or furniture in the first year, plus the amount you would have received under the normal depreciation rates. For example, let’s say you purchase a $100,000 item. You can write off $50,000 in the first year, plus you depreciate the remaining $50,000 over the tax life. You can get an amazing deduction in the first year under bonus depreciation. 2009 is the last year to write off taxes from bonus depreciation for furniture, equipment and other capitalized items unless this tax provision is extended.
You can also write off new or used business assets up to $250,000 through the Section 179 expense, as long as expenses don’t exceed $800,000. This will be reduced to $125,000 in 2010 unless this tax provision is extended. For example, let’s say you purchase $600,000 worth of equipment. You receive an initial $250,000 Section 179 deduction, with an additional bonus depreciation write off of 50 percent of the remaining amount. You can then write off that final remainder over five or seven years.
For 2009, how much estimated income tax does a business need to pay to avoid penalties, while not spending cash unnecessarily?
If you’re a C corporation and reported a loss or no income in 2008, you probably did not owe 2008 taxes last year. Therefore, you won’t have anything on which to base a 2009 estimate; you will have to pay the current tax amount to avoid any penalties.
There are special rules starting this year for S corporations, limited liability companies and other small businesses whose owners have less than $500,000 of 2008 income. If eligible, no penalties will be incurred if the lesser of 90 percent of the previous year’s or current year’s tax amount is paid in equal installments over the current year.
But if you’re not eligible and your income is high, you have to pay 110 percent of the previous year’s tax amount for timely estimates to avoid penalties. If your income is low, you pay 100 percent of the previous year’s tax or 90 percent of the current year’s tax to avoid penalties.
Cathy B. Goldsticker, CPA, MST, is a member and co-practice leader of the tax services practice at Brown Smith Wallace LLC. Reach her at (314) 983-1274 or [email protected].
