Last updated on May 13th, 2019 at 02:24 pm
Tax bill will stimulate business capital expenditures
For the third time in three years, Congress has passed a major tax cut package that was signed into law by President George W. Bush on May 28. Designated by some analysts as the third-largest tax cut in history, the new law provides significant tax relief to both individuals and businesses.
In an effort kick-start the economy through increased spending, the tax breaks for businesses are geared toward accelerating the recovery of expenses incurred for equipment purchases and other capital expenditures.
For many businesses, the primary benefit of the new law is the quadrupling of the Section 179 first-year expense deduction from $25,000 to $100,000.
That tax break allows small businesses to immediately deduct 100% of the cost of most new and used business assets.
The phase-out threshold for the deduction has also been increased from $200,000 and now only impacts businesses that place more than $400,000 of Section 179 property in service in a taxable year.
The new law also makes off-the-shelf computer software eligible for Section 179 expensing, meaning that 100% of the cost of such software can now be deducted in the year of purchase. Previously, software purchases generally had to be written off over 36 months.
The bottom line is that most small businesses can now immediately deduct the entire cost of their equipment purchases in the first year.
All businesses will benefit from the expansion of the first year 30% bonus depreciation allowance that was included in the 2002 tax act for the purchase of new assets.
Under the new law, bonus depreciation jumps to 50% for new assets acquired after May 5, 2003 and before Jan. 1, 2005. The 50% bonus depreciation break for newly acquired assets will not apply, however, if a binding written sales contract was in effect before May 6, 2003.
New assets acquired after Sept. 10, 2001 and before May 6, 2003 are still eligible for the 30% first-year bonus depreciation break. Moreover, the bonus depreciation allowances apply on top of regular depreciation allowances.
In addition, a small business that purchases a new asset can combine the increased Section 179 expense deduction with a 50% write-off of the remaining cost of the asset all in the first year of service.
The new tax act also is good news if you use your car for business. The new 50% bonus depreciation rule has the favorable effect of increasing the maximum first year write-off to $10,710 for new vehicles acquired on or after May 6, 2003.
For new vehicles acquired during 2003, but before May 6, the maximum first-year depreciation deduction is $7,660 under the 30% bonus depreciation rule.
For used vehicles placed in service in 2003, the old depreciation rules apply and limit the maximum first year depreciation deduction to only $3,060.
One unfortunate byproduct of the contentious debate that took place in Congress prior to passage of the tax cut package is that all of the new tax breaks are subject to "sunset provisions." That means that all of the tax benefits provided by the new law will eventually vanish unless Congress acts to extend them. For example, the Section 179 deduction will revert back to $25,000 after 2005 unless Congress makes the increase to $100,000 permanent.
Similarly, the 50% bonus depreciation will expire after 2004 unless Congress takes further action.
Most commentators believe that once the public becomes accustomed to the new tax breaks, Congress will be hard-pressed politically not to make them permanent.
The immediate benefits provided to businesses under the new law, however, may provide the necessary incentive for many businesses that have been postponing capital expenditures to move forward now with new purchases, to take advantage of the accelerated write-offs.
Such spending could spur on the economic recovery that the president is counting on occurring from his bold tax cut package.
Stephen White is a partner in the Milwaukee office of Quarles & Brady.
June 27, 2003 Small Business Times, Milwaukee