New Tax Law Provides Tax Saving Opportunities

By: Dale R. Manske, CPA

The Jobs and Growth Tax Relief Reconciliation Act of 2003 has given, American businesses an opportunity to invest in their futures. The law expanded the current election to expense certain depreciable business assets (Section 179 deduction) and also changed the Modified Accelerated Cost Recovery Systems (MACRS) Bonus Depreciation enacted by the 2002 Tax Act. These modifications allow businesses acquiring qualified, capital assets to deduct a substantial amount of costs in the year of purchase. The following tax law changes may offer your business substantial savings.

Section 179 changes increased the allowable deduction from $25,000 to $100,000 for 2003. Under prior tax law, Section 179 deduction was phased out dollar for dollar if the qualifying property acquisition was in excess of $200,000. This limit has increased to $400,000. Both limits will be indexed for inflation beginning in 2004. The increased Section 179 deduction will expire on December 31, 2005. Section 179 also now allows a deduction for purchased software. This does not apply to proprietary or self-developed software.

Section 179 deduction is limited to the business’ taxable income before the Section 179 deduction. If a business has excess Section 179 deductions, it may carry the deduction forward until it can be fully utilized. The newly modified MACRS Bonus Depreciation will also impact the tax planning opportunities of a Section 179 carry forward.

The MACRS Bonus Depreciation created by the 2002 Tax Act allowed an additional first year bonus depreciation deduction equal to 30% of the qualifying property cost. The 2003 Tax Act enhances this tax benefit which is effective May 5, 2003, and the deduction is not limited by taxable income. The Bonus Depreciation is deductible in the year of purchase without regard to when the capital asset was purchased during the year. Qualifying property is generally defined as property whose original use commenced with the taxpayer after the effective date and must have a recovery period of less than 20 years as defined under the tax code. In addition, a business may deduct the regular depreciation on the difference of the original cost less the Bonus Depreciation.

The 2003 Tax Act extended the Bonus Depreciation expiration date until December 31, 2004 and increased the Bonus Depreciation from 30% to 50% effective for purchases of qualifying property after May 5, 2003.

Following is an example of the tax benefit for $200,000 of qualifying property with a five-year tax life purchased after May 5, 2003. A business would first calculate the Section 179 deduction of $100,000 (assuming the business had taxable income in excess of $100,000). Bonus Depreciation of 50% would then be calculated on the remaining cost basis, which would be $50,000. Calculating the MACRS regular depreciation on the remaining cost basis of $50,000 would allow the business a first year regular depreciation deduction of $10,000. Thus, the total first year depreciation deduction is $160,000 or 80% of the qualifying property cost.

The 2003 Act provides new tax-saving opportunities for both individuals and businesses, many available for only a limited time. Businesses requiring new capital assets for replacement or expansion are being offered substantial first year tax savings. Now may be the time to consider those new purchases!

Dale R. Manske, CPA is the Manager of the Accounting and Auditing Department of Echelbarger, Himebaugh, Tamm & Co., P.C. (EHTC) serving closely held businesses. He can be reached at 616.575.3482 or dalem@ehtc.com. This article was written to provide business owners with the general rules related to change in the depreciation rules in the 2003 Tax Act. Because of the complexity of the Internal Revenue Code, we recommend consulting a tax advisor for proper tax treatment of any property purchased.