helpful tax law changes
The new tax law changes could save you a bundle on major
BY RAYMOND DOHERTY
When the economy is sluggish, one way the federal government can help to boost consumer spending is to offer purchasing incentives to potential buyers. On May 28th, 2003, President Bush signed the Job and Growth Tax Act of 2003 into law, with the intention of doing just that.
In this case, the incentives are in the form of an increase to Section 179 of the tax code, as well as an increase and extension of the 30% Stimulus Deduction
(aka: Bonus Depreciation). These changes are good news; they can potentially save you and your practice a great deal of money. Here, I'd like to explain the new incentives in some detail and provide an example of how they'll affect any large purchases you choose to make.
IMPORTANT NOTE: As is always the case with tax deductions, these aren't automatic; you must elect to take them. Your accountant or financial advisor can help you with the paperwork.
Changes in your favor
Section 179 of the tax code lets you expense the cost of qualifying equipment rather than depreciating the cost over a period of several years. The new provisions, simply stated, allow you to accelerate the deductions you would normally take over several years into the first year.
First of all, the new law increases first year expensing from $25,000 to $100,000 and, for the first time, lets you include "off the shelf" software purchases. This deduction is effective for purchases made beginning on January 1, 2003 and before January 1, 2006 (see table below).
Furthermore, the Jobs and Growth Act of 2003 increases the annual threshold from $200,000 to $400,000. This threshold represents the maximum dollar amount of equipment you can purchase each year before the write-off is reduced dollar for dollar. (In other words, every dollar over that number reduces the amount you can expense by a dollar.
For example, if you purchase $400,001 worth of equipment, your write-off declines to $99,999. If you purchase $425,000 worth of equipment, your write-off declines to $75,000. After taking Section 179 you will then be eligible to take the 50% Bonus Depreciation deduction and the 20% First Year Depreciation.)
A second key change involves the "Bonus Depreciation." Back in 2002, President Bush signed a post-September 11 economic stimulus package into law.
That law, known as the "Job Creation and Worker Assistance Act of 2002," stated that if you had already used Section 179 to expense eligible purchases, you were entitled to take a bonus depreciation of 30% of any amount over the Section 179 deduction.
The 2003 law raises this "bonus" amount to 50%, and it extends the benefit from the original deadline of September 11, 2004 to a new expiration date of January 1, 2005 (see table below).
To qualify for this deduction, the equipment/property must be acquired after May 5, 2003 and placed in service before January 1, 2005. (However, the purchase won't qualify if you had a binding, written contract to acquire it that was in effect before May 5, 2003.)
Finally, any remaining amount (after taking Section 179 and the 50% Bonus Depreciation deduction) can be depreciated over three, five or seven years, depending on the equipment/
For example, under the IRS rule for first year depreciation
(MACRS, five-year life, 200% declining balance), 20% may be deducted the first year the equipment is placed in service. (This is a standard deduction that's been in place for several years.)
New rules vs. old rules
Refer to the table below for a comparison of the tax consequences of a $200,000 equipment purchase made under the old rules and the new rules. The bottom line is that taking advantage of these two expanded tax deductions cuts an extra $20,300 off of your tax bill, effectively reducing the overall cost of the purchase by that amount.
He who hesitates . . .
If you plan to purchase capital equipment soon, then have your accountant sit down with you and make sure that you and/or your business are eligible to take advantage of this new tax stimulus package. (Note: These benefits only apply to purchases and financed purchases; lease agreements aren't eligible.)
Note: This article is written for general reference only and doesn't constitute tax advice.
HPSC, Inc. advises you to contact your accountant or tax advisor to find out how the tax provisions discussed here may help you and your business.
Mr. Doherty is president and COO of
HPSC, Inc., a national financing company based in Boston and is a licensed CPA in Massachusetts. Reach him via e-mail at
Optometric Management, Issue: September 2003