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Write it off
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Example of a Section 179 deduction for 2007:
In 2007, you bought and placed in service a new
MAS 500 ERP software system for $85,000 and a new $100,000 forklift
for your business.
You elect to deduct $27,000 for the forklift
and the entire $85,000 for the software, a total of $112,000. This
is the maximum amount you can deduct.
Your $85,000 deduction for the software
completely recovered its cost. Your basis for depreciation is zero.
The basis for depreciation of your forklift is $73,000. You figure
this by subtracting your $112,000 section 179 deduction for the
forklift from the $100,000 cost of the forklift.
What's the bottom line?
Assuming a 35% tax bracket and a the above
$185,000 cost of equipment:
1st Year Write
Off:
Section 179 |
$112,000 |
Normal 1st Year
Depreciation
($185,000-$112,000 = $73,000 x 20% =
$14,600)* |
$14,600 |
Total 1st Year
Depreciation
($112,000 + $14,600 = $126,600) |
$126,600 |
Tax Savings
Assuming Rate of 35%
(126,600*35%=44,310) |
$44,310 |
1st Year Bottom Line Cost
(185,000-44,310=140,690) |
$140,690 |
* Depreciation calculated at 5 years
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Typically, if property for business has a useful life of more than one year, the
cost must be spread across several tax years as depreciation with a portion of
the cost deducted each year.But there is a way to immediately receive these
income tax benefits in one tax year. The provisions of Internal Revenue Code
Section 179 allow a sole proprietor, partnership or corporation to fully expense
tangible property in the year it is purchased.
The amount you can elect to deduct is not affected if you place qualifying
property in service in for only a part of a 12-month tax year. So if you
haven't spent up to $450,000 in assets, there is still
time to take advantage of Section 179 for 2007.
Eligible Property
Property that may be written off in the tax year of purchase, rather than
depreciated over the asset's useful life, includes:
- Machinery and equipment
- Furniture and fixtures
- Most storage facilities
- Single-purpose agricultural or horticultural structures
- Off-the-shelf Computer software
Off-the-shelf computer software.
Off-the-shelf computer software placed in service during the tax year is
qualifying property for purposes of the section 179 deduction. This is computer
software that is readily available for purchase by the general public, is
subject to a nonexclusive license, and has not been substantially modified. It
includes any program designed to cause a computer to perform a desired function.
Examples include Sage MAS 90, MAS 200, MAS 500 or SalesLogix.
Dollar Limits
The total amount you can elect to deduct under section 179 for most property
placed in service in 2007 generally cannot be more than $112,000. If you acquire
and place in service more than one item of qualifying property during the year,
you can allocate the section 179 deduction among the items in any way, as long
as the total deduction is not more than $112,000. You do not have to claim the
full $112,000.
The amount you can elect to deduct is not affected if you place qualifying
property in service in a short tax year or if you place qualifying property in
service for only a part of a 12-month tax year.
Costs exceeding $450,000
For 2007, every dollar above $450,000 that a business owner
spends on eligible property, he loses a dollar in deductions.
For example, a manufacturer completely re-equips his
facility this year at a cost of $457,000. This is $7,000 more than allowed, so
he must reduce his eligible deductible limit to $105,000: the current $112,000
expensing limit minus $7,000.
Consult with Your Tax Advisor
Reminder: to take advantage of the 2007 tax incentives, your business equipment
must be put in use by year-end. Each company should contact their tax advisor to
learn about the specific impact to their business. |
