Economic Stimulus Plan Includes Breaks for Business Owners
It remains to be seen whether the $168 million Economic Stimulus Act of 2008 will do much to jump-start the U.S. economy. However, the real winners may well be small business owners who take advantage of tax break provisions designed specifically for them.
A Section 179 Increase
One of the most important provisions included in the stimulus package for small business owners is the increasing dollar amount for expensing limits. The limit for first year expense is nearly doubled from $128,000 to $250,000. Instead of depreciating newly acquired assets over a number of years you can deduct the full amount from annual income up to $250,000. The $250,000 amount provided under the new law is reduced if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $800,000. The allowable deduction then decreases by $1 for every dollar spent above $800,000.
So, what does this mean for your business? “This increase can offer tremendous savings in terms of tax liability,” says Elizabeth Luekens, a senior marketing analyst for Direct Capital Corporation, a Portsmouth, NH-based national lender. For example, “a purchase of $48,000 could qualify for a potential tax savings of $16,800, reducing the final equipment cost to $31,200 or 65 percent of the original cost.”* This puts more money into the hands of small business owners, which they can then use to expand or improve their operations.
The Bonus Depreciation Provision
Another key provision in the package is the depreciation deduction. This provides a one-year depreciation deduction for 50 percent of the value of the property placed in service during 2008 when the value exceeds $250,000. The remaining cost is depreciated under the regular depreciation rules.
“Purchases totaling $1.2 million could be eligible for bonus depreciation savings of $210,000, reducing the original cost of the equipment to $990,000,” * says Leukens. This bonus is an incentive for owners to invest in their business now, providing an immediate deduction for half the cost of the investment.
There’s also a sweet spot among the provisions, says Leukens. Businesses that purchase $250,000 to $500,000 in equipment in 2008 may be eligible to take advantage of both provisions. “As an example, taking into account both Section179 savings and bonus depreciation, a purchase of $500,000 could be eligible for tax savings of $131,250 ($87,500 under Section 179 and $43,750 in bonus depreciation), reducing the final equipment cost to $368,750 or less than 75 percent of the sticker price.” *
This is an important legislative victory for small business owners, says Dan Danner, executive vice president of National Federation of Independent Business, a Washington, D.C.-based advocacy group. “Now that the stimulus package has been signed into law small business owners can make plans to invest in their business knowing that they qualify for these tax breaks.”
Many forward-thinking business owners agree. “The stimulus plan gives us the confidence to expand our facilities immediately,” says Bob McCutcheon, owner of McCutcheon Products, a Frederick, MD-based family food business. “With these tax incentives, our business can move forward quickly with plans to invest in new equipment and hire more workers.”
*These examples assume a 35 percent tax bracket. Every business owner’s situation is different. This information is from sources considered reliable, but as always, you must consult your tax advisor to ensure you are taking the correct actions for your circumstances.
