2008 Tax Breaks for New Equipment

There has never been a better time for companies to invest in new machinery and equipment...or at least not since the last recession!

In case you haven't heard, the Economic Stimulus Act of 2008, which was signed into law just before Valentine's Day, provides businesses with two tax incentives that add up to $45 billion in tax savings this year.

No pain and gain

The new law doubles the amount of the Section 179 first year write-off of property cost, from $125,000 to $250,000, and provides 50% bonus depreciation when purchasing new qualifying property. For example, a business that buys $100,000 worth of new machinery that is a five-year Modified Accelerated Cost Recovery System (MACRS) depreciable property has two options:

Elect a tax deduction of $100,000 under Section 179, assuming prescribed purchasing limits are not exceeded, or

Deduct $60,000...that's $50,000 bonus depreciation + $10,000 regular first year depreciation on the adjusted basis.

Assuming a 35% tax rate, a tax savings of $35,000 or $21,000 is obtained under these alternatives, respectively. Profitable companies will fully benefit from these deductions this year. Deductions in excess of taxable income may be carried forward to other years.

Reveling in revenue

Qualifying property for these incentives is generally tangible personal property...typically machinery and equipment...which is subject to a MACRS depreciation recovery period of five, seven, 10, 15 or 20 years. It does not include real property, buildings and building structural components, which are subject to longer depreciation recovery periods.

However, in certain situations, building structural components will qualify if allowed depreciation as tangible personal property on one of these shorter recovery periods, under methodologies used in cost segregation studies. Also, leasehold improvements within a tenant's space in a commercial building will qualify and may be made by either the tenant or landlord.

The new write-off amount of $250,000, under Section 179, applies to taxable years beginning in 2008 and will continue beyond this year. The 50% bonus depreciation is only available for new property where the original use of the property starts with the taxpayer. This incentive is offered exclusively for property placed in service in 2008 with one exception.

If the property to be acquired is subject to a depreciation period of 10 years or longer, has an estimated production period exceeding one year and a cost exceeding $1 million, then the 50% bonus depreciation is available for property placed in service through 2009. To be placed in service means that the property must be installed and ready for use. Therefore, now is the time to order equipment and start capital projects, which require many months of lead-time to meet these deadlines.

Time for action

Now is also the best time to obtain fixed-rate financing for these purchases, as lender's current interest rates are not expected to go lower. This window of opportunity will close later this year, when rates are expected to move up as the Federal Reserve becomes more concerned about inflation than recession.

CapQuest Group is helping business owners reign in soaring energy costs by arranging available financial incentives to make energy-saving equipment purchases more affordable. Rebates, grants and loans at subsidized interest rates, currently under 3%, are available in New York from the New York State Energy & Research Development Authority (NYSERDA). Financial incentives for energy-saving projects are also available in many other states.

The bottom line is that strong tax and energy financial incentives combined with attractive financing will make 2008 the year that business people will long remember.