Capitalize on Tax Savings By lowering taxable income, the Economic Stimulus Act can still cut your 2008 tax bill

Publication: SignWeb
August 25, 2008
By Susan Conner

The Economic Stimulus Act (ESA) padded middle-income families’ wallets last spring and summer, but ESA’s additional goal is to encourage business purchases. Businesses can still enjoy ESA’s two tax incentives: enhanced expensing and temporary bonus depreciation.

Michael C. Meidel, CPA and partner in Peoria, IL-based Clifton Gunderson LLP, a national, certified, public accounting firm, said ESA allows companies to significantly increase depreciation claimed in the first year, which can result in positive cash flow through tax savings. “In these challenging economic times, this can free up sizeable resources to help an operator grow his business,” Meidel said.

Meidel noted the current provision for the 50% bonus depreciation is only for new, qualifying assets purchased between January 1, 2008 and December 31, 2008. The accelerated Sec. 179 expense is for assets purchased in tax years beginning in 2008. The depreciation bonus is elective (you don’t have to use it), and it applies to regular and alternative minimum tax purposes.

Enhanced expensing

Under Code Sec. 179, a taxpayer, other than an estate, trust and certain noncorporate lessors, can elect to deduct as an expense, rather than depreciate, up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in the taxpayer’s trade or business (section 179, property).

Under the expensing election, a taxpayer can deduct costs immediately, rather than depreciate them over several years. A full, expensing deduction is allowed throughout the tax year, even on the last day of the tax year. Also, by lowering the adjusted gross income (AGI) of a taxpayer who is unincorporated (or operated through a pass-through entity), the taxpayer may benefit from itemized deductions or personal exemptions that would otherwise be limited or phased out by the taxpayer’s AGI.

The new law almost doubles the amount of deductible Code Sec. 179 expensing for 2008 to $250,000 and increases the threshold for reducing the deduction to $800,000.

For tax years beginning in 2008, ESA increases the $128,000 expensing limit to $250,000 and the overall investment limit from $510,000 to $800,000.

Most small businesses, and even some moderate-sized businesses with moderate capital-equipment needs, may be able to claim a full deduction for the cost of business machinery and equipment purchased in 2008, thereby reducing their effective cost for the assets. Also, there is no alternative minimum tax adjustment for property expensed under Code Sec. 179.

Arkin & Assoc. P.C. (Savannah, GA) explained in a memo that, for example, calendar-year ABX Corp. purchases, and places in service, $800,000 of expensing-eligible property in 2008. It derives its $1 million of taxable income from the active conduct of its trade or business. If it elects to do so under ESA, ABX can expense $250,000 of the property because it hasn’t exceeded the investment ceiling amount. The $550,000 balance of its purchases has to be written off over the applicable recovery period.

However, in 2008, calendar-year XYZ Corp. buys and places in service $825,000 of expensing-eligible, five-year Modified Accelerated Cost Recovery System (MACRS) property. Because it exceeded the investment ceiling, XYZ may expense $225,000 of its 2008 purchases ($25,000 equals $825,000 minus $800,000) and must depreciate the $600,000 of its purchases over a period of years.

What does this mean in sign-industry terms? Plenty. The benefits easily cover such frequently purchased equipment as inkjet printers and CNC routers. Somewhat unexpectedly, the average price of digital billboards also falls under $800,000.

Digital billboard prices have stabilized in the last 12 to 18 months. The current cost of a 19mm, 14 x 48-ft. digital billboard averages $330,000, according to Darrin Friskney, director of Watchfire Digital Outdoor.

“Even if billboard prices continued to decrease, the reductions wouldn’t equal the revenue operators can make by acting immediately to install a billboard and realize revenue. This is especially true with the tax incentives provided through the economic-stimulus package,” Friskney said.

Meidel explained ESA’s benefits when buying a billboard. Under IRS standards, a digital billboard falls into the category of a capital asset and is generally depreciated over a recovery period of five to seven years, depending on its use. However, a company that buys a digital billboard now can significantly increase depreciation claimed in the first year, which cuts taxes and frees up resources.

Meidel said the depreciation allowance under pre-ESA laws for a digital billboard that costs $400,000 and has a five-year recovery period, would have been $182,400 (Sec. 179 expense of $128,000 + [$272,000 x 20%]. “Under the Stimulus Act, with the increased Sec. 179 expense, a company may claim a first-year depreciation allowance of $340,000 (Sec. 179 expense of $250,000 + $75,000 of bonus depreciation + [$75,000 x .20] = $15,000 regular MACRS depreciation). For a taxpayer with an effective tax rate of 35%, the additional deduction of $157,600 results in accelerated tax savings of $55,160,” Meidel calculated.

Temporary bonus depreciation

Congress has used bonus depreciation several times to encourage business investment. For example, bonus depreciation was available immediately after September 11, 2001.

ESA provides an additional 50% first-year depreciation for most types of new, depreciable property placed in service in 2008. A taxpayer can claim the additional first-year allowance for “qualified property” (most types of new property other than buildings). Qualified property includes computer software (not internally developed, but purchased off the shelf). The property generally must be purchased and placed in service during 2008.

For a digital billboard that costs $400,000 (with a five-year recovery period), Meidel said the regular depreciation allowance would’ve been $80,000 under pre-ESA laws ($400,000 x 20%). “Under the Act, with bonus depreciation, a company may claim a first-year depreciation allowance of $240,000 ([($400,000 x .50] = $200,000) + [$200,000 x .20] = $40,000). For a taxpayer with an effective tax rate of 35%, the additional deduction of $160,000 results in accelerated tax savings of $56,000,” Meidel said.

Meidel noted the current provision for the 50% bonus depreciation is only for qualifying assets purchased between January 1, 2008 and December 31, 2008. The accelerated Sec. 179 expense is for assets purchased in tax years beginning in 2008.

The spreadsheet Meidel provided shows the bottom line for independent operators who purchase a digital billboard this year.

Economic Stimulus Act

Expensing Example of Qualified Assets

Example 1: Purchase $400,000 billboard (bonus depreciation only) Pre-Act Post-Act Difference

Expenses allowed (Sec. 179) – – Bonus Depreciation $0 $200,000 Regular MACRS $80,000 $40,000

Total Deduction $80,000 $240,000 $160,000

Example 2: Purchase $400,000 billboard (Sec. 179 with bonus depreciation)

Expenses allowed (Sec. 179) $128,000 $250,000 Bonus Depreciation $0 $75,000 Regular MACRS $54,400 $15,000

Total Deduction $182,400 $340,000 $157,600

Warning: The more you depreciate now, the less you can depreciate later. But, savvy companies will take advantage of the law to buy new, efficient and “green” equipment that’s being offered now.

To learn more details about capitalizing on ESA, Watchfire has provided a whitepaper that’s available at www.watchfiredigitaloutdoor.com/taxcut1. Also, consult a CPA for details in clarifying your specific business situations.

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