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 As you may have heard, the Economic Stimulus Act of 2008 has increased the maximum limit for Section 179 expense depreciation to $250,000 and created a 50 percent write-off "bonus depreciation" for qualified property placed in service in 2008. This tax law is very tax advantageous for business owners that purchase new equipment before Jan. 1, 2009.
However, before you plan on not paying any taxes in April 2009, please consider the following:
- Over the past years, most states, including Ohio, have not followed the federal government in regards to these accelerated depreciation deductions. So, even though you may not have a federal tax bill, you will have a state tax bill. Currently in Ohio, if you use $250,000 of Section 179 depreciation on your federal tax return, then you would have to add back $187,500 of income to your Ohio tax return.
- From a cash flow perspective, if you are paying cash, then its reasonable to write-off these asset purchases, so that the deductible expenditure coincides with the cash outflow. However, if you are debt financing these asset purchases and you write-off the asset in year one, then there will be no depreciation expense (deductible expenditure) to offset the cash outflow for the debt payments over the course of the loan. You could potentially end up in a situation where you have a profit on the books, but no cash in the check book to show for it.
- If your company replaces its equipment every couple years, then you may not want to accelerate the depreciation on your assets in year one. When you sell depreciated assets, the gain is taxed at ordinary income rates for the portion of depreciation expense previously taken.
Essentially, it's all about the timing of your deductions and when you will show a profit. Are you going to pay Uncle Sam now or later?
Please contact your Rea advisor to discuss the details of these accelerated depreciation rules and what the short-term and long-term effects are to you.
-By Erika S. Schuch, CPA (Millersburg office)
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