Year-end equipment buys fit the bill

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The fourth quarter of the year is when many publicly traded companies prop up their performance records to show more favorable year-end results. The owners and operators of many woodshops and businesses also “cook the books” for their smaller, more closely held woodworking businesses, taking advantage of the tax rules for year-end equipment acquisitions.

Whether you are thinking about tax savings or merely in the market for new equipment, the end of the year is a good time to consider acquiring that equipment. Most professional woodworkers and businesses will benefit from a full year’s worth of write-offs with only a month or two of payments, limiting the actual cash outlay for that new equipment while, at the same time, generating significant tax deductions for the 2008 tax year.

By waiting until January (for most of us using a calendar year), you will miss the current year’s Section 179 deduction — a whopping write-off of up to $250,000 in newly acquired equipment. Plus, there is also a 50 percent bonus depreciation deduction available for the purchase of qualifying property.

Year-end tax savings
A year-end tax strategy is simple in theory: take maximum advantage of tax deductions in years when taxable income is high and defer as many deductions as legally possible in those years when income is down. Others achieve year-end tax savings using a simple formula: defer as much income as possible to the coming year, while making as many purchases as possible in the current year. Making the most of either formula requires constant tax awareness, but remember that taxes should not be the only reason for equipment acquisitions.

One of the most obvious strategies for small-business owners is to purchase needed equipment for both the shop and office, furniture and fixtures — even business vehicles — near the end of the calendar year rather than waiting until the following year. Year-end purchases can often be expensed and written off or deducted from the tax bill for the current year. This means a woodworking business — or a business owner — in the 25 percent tax bracket, can effectively reduce the cost of those year-end purchases by 25 percent within just a few months.

Section 179
Among the rebates and business incentives of the Economic Stimulus Act of 2008, signed into law earlier this year, was a provision that almost doubled the amount of deductible Section 179 expensing for 2008 to $250,000. At the same time, the threshold for reducing that write-off increased to $800,000. Unfortunately, it applies only to property purchased and placed in service in 2008.

Before the law changes, a professional woodworker, or his or her business, could deduct or “expense” up to $128,000 of the cost of depreciable business assets for 2008. If the cost of qualified property placed in service during the year was more than $510,000, the ceiling for that business is reduced, dollar-for-dollar, by the amount over the applicable limit.

The new, temporary rules make no changes to the general rules for the types of property eligible for expensing. Generally, the property must be tangible or real property used in the trade or business, and eligible for depreciation. The property must be used more than 50 percent for business, as well as have been newly purchased.

Although a more complete list of eligible Section 179 property is available in IRS publications or on their Web site (www.irs.gov), generally computers, telephones, telephone systems, copiers, office furniture and other equipment and property acquired for business purposes and used in a woodshop or woodworking businesses qualify. Investment property does not, of course, qualify for depreciation purposes, let alone the Section 179 write-off.

A ‘bonus’ for 2008
Early in 2008, Congress resurrected bonus depreciation as part of the so-called “rebate” law changes in an effort to encourage business investment. The new law provides qualifying taxpayers 50 percent bonus depreciation of the adjusted basis of qualifying property — but only for that acquired in 2008.