WRITE-OFF 50% of
the total cost immediately!
In May 2003, President Bush signed the Jobs & Growth Act
into law. The law expands the depreciation bonus enacted in 2002 and allows
buyers of new equipment to depreciate (i.e., “write off”) an extra 50
percent of the cost of the equipment for the tax year in which it’s placed
in service. The 2003 stimulus law also increased Section 179 business
expensing levels.
How does the depreciation bonus work?
Let’s say you purchase a new piece of equipment that costs $12,000. Under
the depreciation rules that existed before March 2002, you could write off
20 percent (i.e., $2,400) of the cost of the equipment for the year in which
you purchased it. Now, thanks to the 2003 Jobs & Growth Act you can write
off 50 percent (i.e., $6,000) immediately and you can also write off the 20
percent of the remaining 50 percent (i.e., $1,200) of undepreciated value
that you were entitled to deduct under pre-2003 rules. For a $12,000 machine
with a six-year depreciation life that means you can depreciate $7,200 in
the first year, for a tax savings of $4,800!
When do I have to buy my new equipment to take advantage of
the depreciation bonus?
To qualify for the 50 percent depreciation bonus, the equipment must be put
in service after May 5, 2003 and
before January 1, 2005. Property put in service between September 10,
2001 and May 5, 2003 still qualifies for the 30 percent depreciation bonus
enacted in 2002.
What’s the difference between the depreciation bonus and the
investment tax credit?
The depreciation bonus allows you to deduct more from your gross income and
thereby reduces your tax liability by reducing your taxable income. A tax
credit, on the other hand, is a direct credit against taxes owed.
Will the depreciation bonus reduce my overall tax liability?
The depreciation bonus means that you can write off more of the cost of
equipment up front, but it doesn’t increase the overall amount you can
depreciate. That means you’ll still ultimately pay the same amount in taxes
(your tax liability in later years will be slightly increased over what it
would have been to make up for your near-term tax savings.) The advantage of
the new law is that your tax liability for the purchase year will be reduced
and your cash flow will be improved. Ask yourself this: Would you rather
have the tax savings in your pocket to invest now or let the Federal
government hold onto the money for you?
Do I have to take advantage of the depreciation bonus?
No. Although many equipment purchasers will want to use the depreciation
bonus to improve their near-term cash flow, the law allows you to opt-out
and depreciate your equipment according to traditional depreciation rules.
Please note that the information in this publication
is provided by Rehab World as a courtesy to the public. It should not be
construed as tax advice or as a promise of potential tax savings or reduced
tax liability.
This should not be construed as tax advice. For more
information about the depreciation bonus visit www.depreciationbonus.org,
contact your tax professional, or visit the Internal Revenue Service website
at www.irs.gov.
