Thinking of Buying Equipment?

Many U.S. citizens remember the Economic Stimulus Act of 2008 because they received a check in the mail. Businesses benefitted, also, and the same benefits were extended through this year.

The federal Economic Stimulus Act of 2008, enacted in February 2008, included a 50% bonus-depreciation provision for equipment purchased and placed in service in 2008. This provision was extended retroactively to the entire 2009 tax year under the same terms by the American Recovery and Reinvestment Act of 2009 (ARRA), which was enacted in February 2009.

The benefits of this program can be valuable for companies that may be considering purchasing capital equipment. So, ST talked with Michael C. Meidel, CPA , and partner in Peoria-IL-based Clifton Gunderson LLP, and Darrin Friskney, director of Watchfire Digital Outdoor (Indianapolis, IN), to update their financial insights published in ST’s November 2008 issue (page 109).

Friskney said ARRA has been a life preserver: “When the changes occurred last year, we didn’t know their impact. Over a year later, we’ve experienced positive results – in fact, a flurry of activity. Some tried to get orders in before the end of 2008 [and, remember, there’s typically a six to eight-week lag time from the query to the purchase]. From a third to a half of buyers acknowledged the stimulus as a factor in their purchases.”

Burkhart Advertising (South Bend, IN), an OOH company with more than 3,500 billboards in northern Indiana, capitalized on equipment-purchase savings last year by buying a 19mm, 14 x 48-ft. billboard from Watchfire Digital Outdoor. Rob Miller, Burkhart’s executive VP, said, “Picture clarity and service were certainly two deciding factors in choosing Watchfire, but we’re also pleasantly surprised by the endless number of things we can do with our board, from self-promotions and community events to challenging the creative spectrum with our customers. They love it. And we love the added revenue, which actually increased by more than 800% in one of our locations.”

So far, many advertisers, which range from credit unions, medical institutions, retailers and television stations, have bought time on the board.

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The benefits
The accelerated depreciation schedule definitely helps those who would rather invest income in new equipment than pay it in taxes. Meidel had reminded us last year, “In these challenging economic times, these incentives can free up sizeable resources to help an operator grow his business.”

Who and what qualifies:
• This incentive is available to all companies, regardless of the size of their investment. Under this provision, companies are eligible for a 50% “bonus” first-year depreciation.
• The property must have a recovery period of 20 years or less under normal, federal-tax depreciation rules.
• The original use of the property must commence with the taxpayer claiming the deduction.
• The property generally must have been acquired during 2008 or 2009.
• The property must have been placed in service during 2008 or 2009.

If property meets these requirements, the owner is entitled to deduct 50% of the adjusted basis of the property in 2008 and 2009. The remaining 50% of the adjusted basis of the property is depreciated over the ordinary depreciation schedule.
Also, improvements made to existing equipment may qualify for the bonus depreciation. The Section 179 deduction, which allows the immediate expense deduction of up to $250,000 for qualified (new and used) business equipment, subject to an investment limitation of $800,000, was retained for 2009. The expanded Section 179 deduction value is reduced, dollar for dollar, on all capital-asset purchases over $800,000. Those who wish to take advantage of the bonus depreciation incentives must place the equipment into service prior to January 1, 2010.

Additionally, a new provision allows net operating losses incurred in the tax year by qualified, eligible, small businesses to be carried back up to five, prior tax years, which allows an immediate tax refund.

Meidel explained ARRA’s benefits when buying a billboard. Under IRS standards, a digital billboard falls into the category of a capital asset and is generally depreciated over a recovery period of five to seven years, depending on its use. However, a company that buys a digital billboard now can significantly increase depreciation claimed in the first year, which cuts taxes and frees up resources.

Meidel said the depreciation allowance under pre-ESA/ARRA laws for a digital billboard that costs $400,000, and has a five-year recovery period, would have been $80,000 ($400,000 x 20%]. “Under ARRA, with the bonus depreciation, a company may claim a first-year depreciation allowance of $240,000 ($200,000 of bonus depreciation + $200,000 x .20). For a taxpayer with an effective tax rate of 35%, the additional deduction of $160,000 results in accelerated tax savings of $56,000 in the first year,” Meidel calculated.

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As with any tax issue, please ask your CPA if this provision applies to your company or visit www.irs.gov for more information on these provisions. Also, remember, the more you depreciate now, the less you can depreciate later.

How the Economic Stimulus Package Can Save You Money
(The following examples use the Modified Accelerated Cost Recovery System [MACRS] and a 34% income-tax rate.)

Example 1: $800,000 Capital-Asset Purchase and 5-year Depreciation Schedule with Sec. 179 Deduction
Sec. 179 Deduction: (ARRA) $250,000; (Without) $ 0
50% Bonus Depreciation: $275,000
First year MACRS: (ARRA) $55,000; (Without) $160,000
Total 1st-year Tax Deduction: (ARRA) $580,000; (Without) $160,000
Greater Tax Deduction: 262%
Tax Savings in Year 1: $147,000

Example 2: $800,000 Capital-Asset Purchase and 5-year Depreciation Schedule with no Sec. 179 Deduction
50% Bonus Depreciation: $400,000
First year MACRS: (ARRA) $80,000; (Without) $160,000
Total 1st-year Tax Deduction: (ARRA) $480,000; (Without) $160,000
Greater Tax Deduction: 200%
Tax Savings in Year 1: $112,000

Example 3: $400,000 Capital-Asset Purchase and 5-year Depreciation Schedule with Sec. 179 Deduction
Sec. 179 Deduction: (ARRA) $250,000; (Without) $128,000
50% Bonus Depreciation: $75,000
First year MACRS: (ARRA) $15,000; (Without) $54,400
Total 1st-year Tax Deduction: (ARRA) $340,000; (Without) $182,400
Greater Tax Deduction: 86%
Tax Savings in Year 1: $55,160

Example 4: $200,000 Capital-Asset Purchase and 5-year
Depreciation Schedule with Sec. 179 Deduction
Sec. 179 Deduction: (ARRA) $200,000; (Without) $128,000
50% Bonus Depreciation: $0
First year MACRS: $0; (Without) $14,400
Total 1st-year tax deduction: (ARRA) $200,000; (Without) $142,400
Greater Tax Deduction: 40%
Tax Savings in Year 1: $20,160
 

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