Tax Advantage

Overview: On May 5th of 2003, Congress passed into law the “Jobs & Growth Tax Relief Reconciliation Act of 2003”. The Act enabled enormous tax incentives which allow aggressive depreciation deductions for new and used machine tool purchases. Some of the incentives have expired but a few remain, including the Expense Election under Section 179.

Summary

Jobs & Growth Tax Relief Reconciliation Act of 2003

Section 179:

  • Section 179 now allows a business to claim a deduction of $105,000 on capital expenditure purchases.
  • Section 179 doesn’t discriminate between purchases of new and used assets.
  • Section 179 expensing allowances are reduced dollar-for-dollar for the amount in which total annual capital expenditures exceed $420,000.
  • Section 179 can only be taken in the year that the capital asset is acquired and ready for use in the business.
  • Company vehicles may be expensed via Section 179 as long as they are used at least 50 percent for business purposes. However, if the vehicle does not weigh at least 6,000 pounds, the 179 deductions will be all but eliminated via luxury tax limits.

Example

How Section 179 Could Work for You

The following example illustrates how current tax rules regarding depreciation can benefit those making capital equipment purchases in 2005: A company purchases a $400,000 machine from Stopol. The company purchased no other capital equipment during the tax year, so it may deduct $105,000 under Section 179. The remaining $295,000 is then depreciated under an accelerated method over seven years, generating an additional deduction of $42,142.86. The sum of these two deductions is then subtracted from the cost of the equipment, resulting in a total first-year deduction of $147,142.86 or 37 percent of the $400,000 investment.

Snapshot View

  • Cost of Equipment $400,000
  • Section 179 Expense (105,000)
  • Depreciation on Remainder (42,142.86)
  • Total First-year Deduction $147,142.86 37%

This sample presumes that the mid-quarter convention does not apply.

Please note that your annual deduction cannot exceed your aggregate net taxable income for 2005.

The Section 179 Expense Election does not expire at year’s end and is in effect through 2007