New economic stimulus plan brings welcome incentives

Tooling & Production, Apr 2008

Thinking about a machine tool purchase in 2008? There are some new tax incentives you'll want to check out.

Non-bank lenders who specialize in the industry for both leasing and acquisition traditionally have supplied financing to the machine tool industry. Increasingly, and to a greater extent than machine tool builders, distributors are adding financing capability, again through programs or alliances with lenders. Machine tool builders who offer their own financing in partnership with other lenders are another source of financing.

The net result is that there are more sources of financing for machine tool business today than at any time in recent memory.

Whatever your choice, here's the scoop on the Economic Stimulus Plan changes:

The recently enacted bipartisan Economic Stimulus Plan contains increased section 179 expensing for 2008 business equipment purchases, as well as a oneyear 50 percent bonus depreciation allowance for new machine tools and other equipment ordered and placed in service during 2008. section 179 contains a cap of $800,000 that a business may spend on capital expenditures in order to take full advantage of the incentive. Each dollar of expenditures over that amount means one dollar will be deducted from the write-off.

* The boost in section 179 expensing increases the amount that businesses can write off for new and used equipment purchases in 2008 from the current $128,000 to $250,000. Moreover, the cap on how much equipment can be purchased to enjoy the write-off has been increased from the current $510,000 to $800,000.

* The one-year 50 percent bonus depreciation means you can write off in 2008 an extra 50 percent of the cost of your new equipment that you buy and start using in 2008.

Here's how the new provisions work: Let's assume that the Feckless KeyHole Co. is in a seven-year asset depreciation class. The company orders and puts into service a new machine tool costing $100,000. Under the new 50 percent bonus depreciation, Feckless can write off 57 percent of the asset in the first year, as opposed to only 14 percent had bonus depreciation not been enacted for the 2008 tax year.

50 percent bonus depreciation

OLD LAW (pre-2008 change) - $100,000 crew machine

1st year total depreciation =14 percent = $14,000

NEW LAW- $100,000 new machine

1st year bonus deprecation: 50 percent of $100,000 = 550,000

Plus 14 percent regular depreciation on remaining property basis ($50,000) = $ 7,000

TOTAL 2008 deduction on $100,000 machine = $57,000

That's 43 percent more ($43,000) in tax deduction for 2008 new machine purchase.

Section 179 boost for businesses

Under the new law, businesses (whose total equipment purchases in 2008 don't exceed $800,000) can now also expense the first $250,000 for the 2008 tax year (until 1/1/09). The 50 percent bonus depreciation can then be taken on the remaining basis of the machine, if it is new.

OLD LAW (pre-2008 change) - $400,000 on new or used machine

Section 179 deduction = $128,000

Plus 14 percent regular depreciation on remaining property basis ($272,000) = $ 38,080

TOTAL first-year deduction = $166,080

NEW LAW- $400,000 new machine

Sec. 179 deduction = $250,000

Plus 50 percent Bonus Depreciation on remaining basis = $ 75,000

And 14 percent on remaining 1st year basis of property = $ 10,500

TOTAL 2008 Deduction on $400,000 new Machine = $335,500

Total 2008 Deduction on $400,000 used Machine = $271,000

(Bonus Depreciation does not apply to used equipment)

To take advantage of the section 179 deduction, a business must choose it on IRS Form 4562, Depreciation and Amortization. More details about the deduction can be found in the IRS Publication 946, How To Depreciate Property, downloadable at www.irs.gov/pub/irs-pdf/p946.pdf.

Reprinted with permission by AMT. AMT - The Association For Manufacturing Technology, www.rsleads.com/804tp-152