"Capital spending is hardest hit during a slow economy," says Chris Barret, tax partner at Crowe Chizek and Co. LLC's Columbus office.
Barret says in order to spark the economy and prevent a slowdown in capital spending, lawmakers offered temporary tax breaks on depreciation.
"These changes will only last a few years," Barret says.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 allows companies to take up to 50 percent in bonus depreciation on a capital expense such as equipment or vehicles. But before you sign that large check, make sure you consider other aspects of the tax changes as well, says C. Ricci Obert, tax principal with Ernst & Young LLP's Columbus office.
"The changes in depreciation offer some definite opportunities, but there are also some issues to watch," Obert says.
According to Obert, if businesses did not utilize federal bonus depreciation and did not properly elect out, they may have adopted an erroneous accounting method. Obert says states have decoupled from the federal bonus depreciation, resulting in unique rules in each state jurisdiction. Businesses with operations in multiple states may have trouble keeping track of the various state depreciation rules.
Accounting software offers the least expensive option for tracking these laws, but Obert cautions that they aren't always the best solution.
"I recommend having an expert help the company rather than software, and the company needs to have a protocol in place for immediately entering the correct depreciation information in the company's books and for tax returns," Obert says.
Barret agrees that while the new laws can work in favor of many companies, they're not necessarily right for everyone.
"My best advice is to consider the impact of these changes in the timing of capital expenditures," he says. "In some cases, it might not make sense to accelerate the purchases, and in others, it would."
For example, he says, if your company is experiencing net operating losses, more capital expenditures will only add to the loss, not provide a cash benefit -- all the more reason, he says, to confer with an expert.
"As with all tax issues, having the right professional as a business adviser is critical to staying abreast of recent tax developments," Obert says. How to reach: Crowe Chizek and Co. LLC, (614) 469-0001 or www.crowechizek.com; Ernst & Young LLP, (614) 233-5625 or www.ey.com