A Small Business Boost

Collette McKenna Parker

February 7, 2008

Every cloud has a silver lining, and for this economic dreary day it's Washington's economic stimulus package.

Basically, the government wants companies to buy stuff – lots of stuff – and they are willing to grant some immediate tax write-offs to encourage this. "The primary motivation behind this package is to continue to encourage business growth by promoting investment in operating assets," says Robert Martin, CPA and lecturer of accounting at Kennesaw State University's Coles College of Business. The main tax-tool to accomplish this is increased depreciation deductions.

What you need to know

"The major boost to businesses is that Congress has increased the amount of Section 179 [an IRS code] expense deductions," says Ellen Springer, CPA and president of Strategic Business Resources, Inc.

What that means: Normally, when a business owner buys an asset that will last longer than one year they cannot write off the total capital expenditure that year, but must depreciate it over many years – sometimes decades. This new law allows companies with tangible property, which is anything that's not real estate – so furniture, equipment, trucks – can make the deduction in the year it's purchased.

The existing law states as long as a company did not spend more than $500,000 in qualified tangible property in 2007 they can write off up to $125,000 and depreciate the rest (and it's already raised for 2008 to $128,000). Under the proposed stimulus package guidelines, the investment limit is raised from $500,000 to $800,000, and increases what the company could write off up to $250,000.

This includes "used" property, as long as it is new to the business. And even if the company borrows the money to buy the asset, as long as the business owns it and the title is in their name (the property can't be leased) they can take the tax deduction in 2008 and continue to pay for it over a couple of years.

Also included in the stimulus package is a "bonus depreciation" option. So, if a company chooses not to deduct $250,000 of tangible purchases, they can take a 50 percent deduction for any qualified asset purchases. Instead of writing asset purchases off over a number of years they can take the bonus depreciation, which allows a 50 percent deduction immediately and then spreads the remainder over a number of years.

The Senate version of the stimulus package has added one additional option for businesses. "This includes a liberalization of the net operating loss (NOL) carryback rules," says Martin. Under existing law, businesses can carry back current year operating losses for up to two years in order to claim refunds for taxes paid in those years. The Senate version of the stimulus package would extend that NOL carryback provision to five years.

"The effect of the NOL provision in the Senate's version of the stimulus package would be to grant some tax relief to businesses that may suffer economic losses this year and, hence, not be in a position to make substantial investments in assets and take advantage of the enhanced depreciation provisions," Martin explains.

An important asterisk to these deduction options is that they are options: a business has the choice to elect only one of any of these options. They will not be given the option to elect all three. And remember, this legislation is designed to boost the economy, and therefore it is only temporary; it's only good for assets purchased in 2008.

Immediate relief

The economic stimulus package is designed to make Americans put a little money back into circulation; so when the personal refund checks come, you're supposed to go out and buy some exciting groceries or maybe a nice bottle of wine. But to take advantage of the business incentives, a company owner is supposed to buy a new bulldozer, or maybe a fancy new software system.

The deductions in the stimulus package let businesses get immediate tax benefits. "Companies can replace any equipment that they need to replace, or they can expand their business and purchase the needed equipment, upgrade equipment and hire more people," says Ellen Springer, CPA and president of Strategic Business Resources, Inc. The tax savings allows companies to make these investments and be more competitive.

In very simple terms, the immediate deductions are like the government paying for part of your purchase. For example, if you want to buy something for $1,000.00, and your company is in the 35 percent tax bracket, under normal circumstances you'd have to pay $1,000.00 out of pocket and then the taxes on top. But if the government gives you an immediate deduction, it's the same as you paying $650.00 and the government paying $350.00.

"We call it the ‘net of tax cost,'" says Springer. And normally, even if you'd get the $350.00 back, you would have to write it off over a number of years and wait a number of years to get that $350.00, she explains. "Cash flow is very important to small businesses, and getting a tax benefit allows them to make decisions that they would normally have to wait to make." The idea is now to go ahead and make the purchase and make money with that equipment or investment.

If you're just starting a new business and have to buy everything up front, the provisions in the stimulus package allow you to get a deduction in the years you don't have as much income, or to offset any income you might get.

"The hope is that small companies can invest in their business, and in therefore they can continue to provide good paying jobs for the American public," she says.

So start buying.

Photo courtesy of © Tsm | Dreamstime.com

Related Articles:

The Key to Security
How do you mitigate the risk of losing key employees?

A Small Business Boost

Email to a Friend

Collette McKenna Parker

February 7, 2008