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First Year Write-off
Increases to $250,000
in 2008 |
Make sure your company takes full advantage of one of the best tax breaks available to business owners
today -- the "Section 179" first-year depreciation allowance for equipment.
Take a look at what makes this deduction so valuable:
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Section 179 Deduction Goes Up for One Year Only
The Economic Stimulus Act of 2008 almost doubles the maximum Section 179 deduction -- but only for the 2008 tax year when the maximum write-off is generally increased to a whopping $250,000 (up from $128,000 before the new law). For 2009 to 2010, the maximum deduction will revert to $125,000 (plus inflation adjustments) unless Congress takes further action.
Under a phase-out rule, a business that buys a great deal of assets that would otherwise qualify for Section 179 deductions can lose part or all of its write-off. Specifically, the maximum Section 179 deduction for an affected business is reduced dollar for dollar by the amount of qualifying assets in excess of a threshold for the year. For tax years beginning in 2008, the phase-out threshold is generally increased to a whopping $800,000 (up from $510,000 before the new law).
The higher threshold means that many more medium-sized businesses will be eligible for Section 179 deductions for tax years beginning in 2008. For 2009 to 2010, however, the phase-out threshold will revert to only $500,000 (plus inflation adjustments) unless Congress acts to extend the higher amount. |
 With Section 179 - You can write off business equipment in one year, rather than depreciating it over several years. This includes computers, copiers, fax machines, telephone systems and office furniture. The annual Section 179 allowance for taxable years beginning in 2008 is $250,000, up from $125,000 in 2007. (See right-hand box for details.)
Without Section 179 - Money spent to purchase business-related equipment must generally be recovered over a period of years, through depreciation or amortization.
Ground Rules: In order to qualify for the Section 179 tax break, you must use the equipment more than 50 percent of the time for business. (If you use it for personal purposes too, you must keep records and you're only allowed to deduct the business-related percentage.)
The amount you write off for Section 179 can't exceed the taxable income from your business. That may be a problem for C corporations if the business zeroes out its income (typically by paying deductible salaries and bonuses to shareholders) because there won't be enough income to cover the Section 179 election.
It might be better if the corporation pays less compensation and keeps enough taxable income to cover a Section 179 election.
You can carry over any excess to future years if you run up against the income limitation. The deduction also begins to phase out when you buy more than $800,000 worth of equipment during 2008 ($500,000 in 2007).
What if you anticipate your C corporation will operate at a loss in 2008 but expects to turn a profit in 2009? You might be better off postponing eligible expenditures to the profitable year of 2009 when the company's cash flow is better and the Section 179 deduction can be fully taken advantage of that year.
With some careful timing, you can utilize your full $250,000 tax break for 2008. Look around your company toward year-end and buy any equipment you need.
As long as you "place it in service" by December 31, you can deduct the equipment with Section 179. You can even pay for it next year on credit and still write it off on this year's tax return.
 Tip: Many business owners are involved in more than one venture. In the case of pass-through entities (partnerships, LLCs, and S corporations), the dollar limitation rules for the Section 179 deduction apply at both the entity level and the owner level. (IRS Regulation 1.179-2) Therefore, advance planning may be necessary to maximize Section 179 deductions at the owner level, which is where the write-offs really count. Consult your tax adviser for details.
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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