AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009

 As a result of the passage of the American Recovery and Reinvestment Act of 2009, the Section 179 Federal Income Tax Deduction allows companies to deduct up to $250,000 from their taxable income.  In addition, a special 50% bonus depreciation deduction has been made available.  The following outline highlights the major points of each of these tax breaks:

 SECTION 179 - $250,000 DEDUCTION:

• In 2009, a qualifying company can deduct the first $250,000 in equipment (Section 179 Property) expenditures as long as the company’s equipment purchases don’t exceed $800,000.   

• For 2009, if the total cost of qualifying equipment exceeds $800,000, the maximum annual expensing amount of $250,000 is reduced on a dollar-for-dollar basis by the amount that the qualifying property exceeds $800,000.  For example, if a company purchases $900,000 worth of qualifying equipment, its annual expensing allowance decreases to $150,000 (i.e. $900,000 - $800,000 = $100,000 over the limit; $250,000 - $100,000 = $150,000). 

• Because of the phase-out nature of the law, a qualifying company that purchases (or leases with a $1 buy out) over $1,050,000 of qualifying equipment in 2009 is not eligible for any expensing allowance. However, companies may preserve the full Section 179 expensing allowance of $250,000 for the year if the purchases over $800,000 are made with a qualifying operating (true) lease.

• The Section 179 deduction cannot cause or increase a loss. 

• While the benefits of the Section 179 write-off can’t be carried back, any unused portion of one year’s write-off can be carried forward to the next year.

• New and used equipment are eligible for this benefit.

50% BONUS DEPRECIATION PROVISIONS:

• In addition to the Section 179 deduction and the standard depreciation deduction, an additional first year depreciation deduction equal to 50% of the non-expensed portion (i.e. adjusted basis) of the qualified property can be claimed for equipment originally placed in service on or before December 31, 2009.

• The 50% Bonus Depreciation can create or increase a loss.

• In addition to reducing or eliminating taxable income in the year a machine is purchased, if the 50% Bonus Depreciation creates a net operating loss, it can be carried back and used to reduce or eliminate taxable income from prior years.  In other words, not only can a machine purchase provide large tax savings, it can possibly put money into the purchaser’s pocket.

• This benefit is limited to new equipment.

• The 50% Bonus Depreciation is set to expire on January 1, 2010.

EXAMPLE*:

The method to determine the adjusted basis of qualified property and the first year impact of this tax break is outlined below:

 Machine cost:                                                                       $350,000

 Section 179 deduction:                                                     $250,000

 Adjusted basis of qualified property:                                    $100,000

 Bonus depreciation:                                                             X     50%

 Bonus depreciation amount:                                           $  50,000

 Standard depreciation:

 $350,000 - $250,000 - $50,000 = $50,000 X .1429**=           $ 7,145

Total first year tax benefit for qualifying companies:   $307,145

*      Tax laws are subject to change at any time.  This information is for general guidance and is not intended as specific legal, tax or accounting advice.  These calculations are only estimates.  Always contact your accountant or financial advisor to determine eligibility for and the exact tax implications of the above-referenced information.    

**     This percentage applies to equipment put in service in the first three quarters of the year – the percentage may be reduced if the equipment is put in service in the fourth quarter.