So if you purchase qualified equipment worth $500,000 you would get the following benefit:
Section 179 deduction $250,000
Bonus Depreciation $125,000
MACRS Depreciation $ 25,000
Total tax deductions $400,000
Tax Benefit @ 35% $140,000
Now I assume you want the bad news ... and there is some. If you write off $400,000 of a machine costing $500,000 in 2008, you only have $100,000 to write off in the future. If you follow a ?Bird in Hand? philosophy then you might want to take the bucks while you can. In any event, any time you use this type of benefit you have to stay on top of your tax planning in the future.
For example, should you sell a piece out of your fleet that has zero tax basis, the gain is 100 percent taxable at ordinary rates. If you normally had depreciation deductions to offset these gains, you didn?t have to worry about it. But if you used the Section 179 and bonus, you might not have the tax deductions you need to cover the gain. You could, of course, use a 1031 tax-free exchange to defer the gain, but that is a story for another day.
So, do you use the benefits or not? To make that determination you need to know the following:
- How much equipment you plan on buying in 2008.
- How much tax you paid in the past two years and at what bracket.
- What your expected tax profits are for 2008.
- You also have to keep in mind the enticing interest rates available for equipment purchases.
If you have a need for equipment and can take advantage of the tax benefits, it is worth investigating. If not, you don?t have to use these temporary rules. The interest rates alone might interest you enough to make a purchase.
You can go to www.depreciationbonus.org for AED?s Stimulus Package Benefit Calculator. Fill in the cost of the equipment being purchased and what you have available for Section 179 and it will do the rest.
For those of you that have the need, the Stimulus Package provides benefits. For those of you who don?t know if you have the need, now is the time to find out.
Garry Bartecki is director of dealer/distributor services at BDO Seidman LLP of Chicago, as well as consultant to Associated Equipment Distributors (AED). He has also worked as an independent CPA and consultant to equipment dealers. He can be reached by phone at (312) 616-4677 or email at email@example.com.