New Business Depreciation Rules of 2008J.M. Luna
November 24, 2008 — 2,023 views
As we come to the close of 2008, this economy has caused a volatile year for many. Many Americans have had to scramble to make a living and adjust to changing times. With higher gas prices and costs of living escalating to new levels, many businesses are on the brink of extinction. For the lucky few, that have had a profitable year, it is time to maximize the situation and plan to minimize the tax burden. The government has made some substantial changes in 2008 for investing in the U.S and we are going to look at the depreciation area for qualified acquisitions.
The following is one of the incentives that is available for 2008:
2008 Changes for Eligible Depreciation ( Look at the example below)
Increased Section 179 limits. The maximum section 179 deduction you can elect for qualified section 179 property you placed in service in tax years that begin in 2008, has increased to $250,000 ($285,000 for qualified enterprise zone property and qualified renewal community property). This limit is reduced by the amount by which the cost of section 179 property placed in service in the tax year exceeds $800,000. For qualified section 179 Gulf Opportunity (GO) Zone property placed in service in certain counties and parishes of the GO Zone, the maximum deduction is higher than the deduction for most section 179 property.
Special depreciation allowance for certain property. You may be able to take an additional first year special depreciation allowance for certain qualified property (defined below). The allowance is an additional deduction of 50% of the property's depreciable basis (after any section 179 deduction and before figuring your regular depreciation deduction).
Property that qualifies for this special depreciation allowance include the following.
Tangible property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less
Water utitiliy property
Off-the-shelf computer software
Qualified leasehold improvement property
Examples of Qualified property are the following and must also meet all of the following tests.
Dump trucks, garbage trucks, water trucks, boom trucks, vacuum trucks, semi trucks, excavators, backhoes, forestry equipment, farm equipment, office equipment, machinery and equipment, production equipment, computers etc
You must have acquired qualified property by purchase after December 31, 2007, and before January 1, 2009. If a binding contract to acquire the property existed before January 1, 2008, the property does not qualify. Additionally, the
Qualified property must be placed in service after December 31, 2007, and before January 1, 2009 (before January 1, 2010, for certain transportation property and certain property with a long production period).
The original use of the property must begin with you after December 31, 2007.
In a nutshell here is an example to illustrate the information above. Lets assume the following facts. You are a corporation, sole proprietorship etc and your net profit is $600,000 from January 1, thru October 31, 2008, November and December will be a breakeven therefore, we are at the $600,000 profit for the year based upon our estimate. We have some new signed contracts for the end of 2008 or beginning of 2009 and we need to buy some major equipment in the last month of the year and take delivery before the end of the year. We can get this equipment financed and the monies required down are minimal, maybe $10,000, and the total purchase price is $400,000.....If we execute this contract before the end of the year and take delivery, we are entitled to a $325,000 deprecation expense deduction for 2008. The way I came up with is deduction is by studying the information above. The first $250,000 of qualified acquisitions are dollar for dollar and the balance is $75,000 ($150,000 x 50% = $75,000) . The $150,000 is the remaining basis after deducting the special $250,000 from the original acquisition cost of $400,000. It is important to understand that the cash outlay of $10,000 has nothing to do with the depreciation deduction for 2008.
Obvious from this example, this could be a big bonanza to reduce taxes in 2008 without the major outlay of upfront money. It is important to obtain current interim 2008 financial statements from your CPA, bookkeeper, or in house books now to study your tax situation for 2008. This example above can be scaled back or up to a smaller or larger version and can have a tremendous impact on your company's 2008 tax situation. These depreciation rules only apply to a profitable company and shouldn't be considered for additional operating losses. Additionally, it is recommended that you consult with a qualified tax person because this tax law change is new and is higher upgraded from the allowable deductions for 2007.. For companies looking to acquire qualified assets for 2008 with substantial profit, there are limitations and phase out rules for acquistions over $800,000. Tax planning is important at this time of year whether you are Profitable or not and consulting with a qualified tax person is as equally as important . The dollars invested in this area, if done properly, will reward your company handsomely
About the Author
J.M Luna has over thirty years in the financial field. This includes accounting and taxes, leasing, hard asset money and commercial loans. U.S Corporate Capital Leasing Group assists the startup and season businesses for financing in all different industries.