While the media has focused its attention on the act's dramatic reduction of income tax rates on corporate dividends and long-term capital gains, the law is designed to help small businesses as well, with provisions to provide incentives to buy technology, machinery and equipment, and to expand.
Expensing equipment purchases
Section 179 of the tax code allows business owners to expense immediately -- rather than depreciate over several years -- their purchases of tangible personal property placed in service during the tax year. The Section 179 deduction is limited to the maximum amount allowed by law, as well as to spending and net income limits.
In an effort to encourage capital investment in technology, machinery and other equipment needed to expand, JGTRRA increased the maximum deduction from $25,000 to $100,000 for tax years after 2002 and before 2006. The spending limit was increased from $200,000 to $400,000.
Taxpayers exceeding the spending limit lose the deduction dollar for dollar and lose the entire deduction when spending reaches $500,000. Any Section 179 deduction cannot exceed the taxpayer's taxable income computed without regard to the Section 179 deduction. In other words, Section 179 expenses cannot create or increase a net operating loss. Taxpayers can, however, carry over any unused Section 179 expense to future tax years.
The new act expands the definition of eligible property to include off-the-shelf computer software. Although such software is not usually eligible for this treatment, JGTRRA allows expensing under Section 179 if the taxpayer places it in service in 2003, 2004 or 2005.
This provision is due to expire Dec. 31, 2005.
If you purchase brand new equipment with a recovery period of 20 years or less, or if you make leasehold improvements, JGTRRA allows you to take a 50 percent deduction in the first year for qualified property placed in service after May 5, 2003, and before Jan. 1, 2005. The new law increases the deduction from 30 percent.
This 50 percent bonus depreciation does not apply to property purchased after May 5, 2003, if there was a written, binding contract for its purchase in effect before May 6, 2003.
So if you ordered new equipment in March that wasn't installed and placed in service until June, the old 30 percent bonus depreciation will apply. Taxpayers may take the 50 percent bonus depreciation, elect the 30 percent bonus depreciation or elect out of either bonus.
Unlike the Section 179 provision, there are no spending or income limitations. Therefore, bonus depreciation can be used to create or increase a net operating loss.
Deduct your SUV
JGTRRA makes it possible for businesses to expense up to $100,000 of equipment purchases in the first year of service. Headlines have suggested this is an opportunity to buy and completely deduct the cost of a SUV in a single tax year, and there is truth to these headlines.
Congress passed a law many years ago limiting the deductions a business can take on luxury autos used for business. A luxury auto was defined as an auto costing from $11,250 in 1986 to as little as $15,500 in 2002. To avoid affecting real business vehicles, such as trucks, the law was written so that autos with unloaded gross vehicle weight over 6,000 pounds were exempt from any limits.
If your auto weighs more than 6,000 pounds, it is not subject to the limitations imposed by the luxury vehicle rules. Most SUVs weigh more than 6,000 pounds and, therefore, are not subject to the limitations.
If your SUV weighs 6,000 pounds or less, the maximum first year's deduction is capped at $10,710, assuming it is used 100 percent for business.
The new provisions provide a wealth of opportunities for businesses. As companies plan for the end of the year, consideration should be given to the tax savings best generated by the combination of both the Section 179 and the bonus depreciation provisions.
Keep the following points in mind:
* The amount expensed under Section 179 will decrease the depreciable basis for computing the bonus depreciation.
* Section 179 is subject to limitations and applies to new and used property.
* Bonus depreciation is not subject to restrictions but applies to new property only
* The decision to elect Section 179 expense or opt out of the bonus depreciation does not have to be made before filing a tax return, and the effects of both provisions should be a part of any investment decision.
Martin Tanenbaum serves as tax principal at Tauber & Balser, an Atlanta-based CPA firm specializing in accounting and auditing, SEC reporting, forensic accounting, financial and tax consulting, mergers and acquisition assistance and estate tax planning. He specializes in corporate, personal and partnership income tax research and compliance with special expertise in the retail industry. Reach him at (404) 814-4920 or ( firstname.lastname@example.org).