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Corporation Tax Saving Tips
by David Barnes
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Overview
Corporations can realize big tax savings on the purchase of new and used equipment through Sec. 179 expensing. The 2009 American Recovery and Reinvestment Act (ARRA) increased the 179 expensing limit to $250,000, as long as a company doesn't purchase capital equipment totaling more than $1,050,000.
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Qualifying Equipment for the Sec. 179 Deduction
Equipment that qualifies for the Sec. 179 deduction is tangible personal property purchased for use in a trade or business. It must by used at least 50 percent in the business to qualify, and the deduction applies only to the business use portion. Tangible personal property includes machinery, equipment, fixtures, furniture and vehicles that are more than 6,000 lbs. in gross vehicle weight. Capital assets that do not qualify include land, buildings and improvements, permanently attached cooling and heating units and automobiles (under 6,000 lbs.).
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Using the Sec. 179 Deduction
Only corporations with a net profit before the Sec. 179 deduction can take the expense in the current year, and the deduction can only offset the company's net income up to the $250,000 limit. In other words, if the company's net income before the Sec. 179 deduction is $150,000, the maximum deduction is $150,000. The excess is carried forward to future years, so it is not lost.
Phase out of the Sec. 179 deduction begins at $800,000 total purchase of qualifying equipment. There is a dollar for dollar reduction above $800,000, and no deduction Sec. 179 deduction is allowed if the total purchases are $1,050,000 or more. This tax break is designed for small businesses.
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Additional Depreciation Deductions for Sec. 179 Equipment
In addition to the $250,000 expense deduction, bonus and regular depreciation are also available on qualifying equipment. For example, if a business purchases a machine for $650,000, it can claim the $250,000 expense, leaving a depreciable basis of $400,000. Bonus depreciation allows a further 50 percent deduction in the current year for an additional $200,000.
Calculate regular depreciation on the remaining $200,000 over the machine's estimated useful life (five years for this example). Using the half-year convention, this means the company can take an additional $40,000 in depreciation expense this year. The total amount expensed in the current year is $490,000. The remaining $160,000 will be recovered at $40,000 per year for the next four years.
