Step Up to Higher Section 179 Deductions
Be Aware of Two Key Tax Law Limits
The Economic Stimulus Act of 2008 increased the annual limits for the Section 179 “expensing” deduction. For 2008, your business can currently write off up to $250,000 of qualified business assets placed in service during the year. Prior to the new law, the maximum deduction was $125,000 (inflation-indexed to $128,000 for 2008).
The increased Section 179 deduction may be claimed in conjunction with the 50% “bonus depreciation” deduction available under the new law. If there still is a balance after taking these two tax breaks, the remainder can be written off over time under the regular depreciation rules.
However, two important rules may limit your annual Section 179 deductions:
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Annual business income limit: The expensing deduction cannot exceed the net taxable income from all the businesses you actively operate. For this purpose, net income is figured without regard to expensing the 50% deduction for self-employment tax and any net operating loss (NOL) carryforwards or carrybacks. For example, suppose you are a self-employed individual. Your net taxable income for 2008 is $200,000. If you buy assets costing $225,000 and place them in service this year, your Section 179 deduction is still limited to $200,000. The remaining $25,000 can be recovered through regular depreciation deductions.
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Annual dollar cap: If the total cost of qualified business property placed in service during the year exceeds an annual threshold (indexed for inflation), the maximum expensing deduction is reduced on a dollar-for-dollar basis. Fortunately, the new law also increased this threshold. For 2008, the reduction begins when the cost of assets exceeds $800,000. Prior to the new law, the dollar cap was $500,000 (inflation-indexed to $510,000 for 2008).
Suppose your company places new equipment in service costing a total of $850,000 in 2008. Because you have exceeded the annual threshold by $50,000, your Section 179 deduction for 2008 is limited to $200,000 ($250,000 maximum allowance minus $50,000).
Note that the higher Section 179 maximum and dollar caps are effective only for 2008. The figures revert to their previous levels for 2009 and 2010. Other special rules may apply to deductions for vehicles used for business purposes. Contact a professional tax adviser for more details.
Deductions for business assets in 2008 are claimed in this order: (1) Section 179 deduction, (2) bonus depreciation deduction and (3) regular depreciation deduction. Example: Your business buys new computers in 2008 costing $300,000. Under the new rules, you can expense $250,000 of the cost under Section 179. Then your business claims 50% bonus depreciation on the $50,000 balance, or $25,000. Finally, you can take a first-year regular depreciation deduction for 20% of the balance, or $5,000. Result: Your business is able to deduct a total of $280,000 cost in 2008. The $20,000 remainder is available for regular depreciation in subsequent years.
This is a good time to meet with your tax advisor to determine the best course of action this year. Please contact us.
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