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Special Focus

New Tax Laws Provide Added Incentive for Capital Equipment Purchases

by Staff

November-December, 2003
As the graphic arts industry, and the Nation as a whole, begin to rise out of the past few years of economic slowdown, new tax laws and bonus depreciation provisions have been put into place that can benefit those companies considering the purchase of capital equipment. The Job Growth Tax Relief Reconciliation Act of 2003 can provide significant tax incentives for companies that invest in equipment now. The Act, enacted this past May, modifies the Job Creation and Worker Assistance Act of 2002, as it relates to the “bonus” depreciation (Section 168 k) and Section 179 Federal Income Tax Deduction.

To better understand the new laws and their benefits, let’s take a look at some of the most commonly asked questions.

What is the Section 179, Tax Deduction and when does it apply?
Under Section 179, Tax Deduction, a company is allowed to deduct the first $100,000 (up from $25,000) of equipment purchased in 2003 from its taxable income. This deduction is available in full for companies purchasing up to $400,000 (up from $200,000) of equipment in a calendar year. It phases out between $400,000 and $500,000, and is not available to companies purchasing over $500,000 of equipment in a calendar year. If your equipment purchases exceed the allotted amount, you may still take advantage of the ‘bonus’ depreciation.

What is the ‘Bonus’ Depreciation Provision and when does it apply?
Under Section 168 (k), ‘Bonus’ Depreciation Incentive, taxpayers can claim an additional first year depreciation deduction equal to 50% of the adjusted basis of qualified equipment (for equipment purchased after May 5, 2003). Equipment acquired prior to May 5, 2003, would qualify for an additional deduction equal to 30% (rather than 50%) as provided for in the Act of 2002. In effect, the depreciation bonus was raised from 30% to 50%. The “bonus” depreciation is in addition to the depreciation deduction normally allowed under IRS depreciation rules.

Do the new laws apply to both new and used equipment?
No, Section 168 (k) applies only to new equipment purchases, where Section 179 applies to both new and used equipment purchases.

How long are the new tax laws in effect?
Initiated on May 5, 2003, the new laws are in effect until December 31, 2004. Equipment purchases have to be made within that time period.

Can a company use Section 179 and Section 168 (k) with a Net Operating Loss (NOL)?
In Section 179, if the company has a NOL, the deduction cannot be claimed; however, in Section 168 (k) a company with a NOL can claim the deduction.

If a company has a NOL, can it apply Section 168 (k) toward future years? 
No, it can only be applied towards existing and previous years. 

How does all of this affect the bottom line?
In order to better understand how these laws actually can affect a company’s tax liability, take a look at the following two examples:

Example 1 - $400,000 New Press Depreciated Over 7 Years (Straight-line method)

The first example sets out a scenario based on $400,000 equipment purchase, thereby implementing the new tax deductions allotted under Section 179 and Section 168 (k).

Section 179 Deduction

$100,000

* Extra 50% Depreciation bonus

$150,000

**Regular 1st Year’s Depreciation (14.29%)

$ 21,435

Total 1st Year’s Depreciation

$271,435

NET COST AFTER THE 1ST YEAR

$128,565

* To compute the Bonus Depreciation amount, subtract the Section 179 deduction ($100,000) from the amount of equipment purchases ($400,000 in the example). Next, take the balance or net ($300,000) and multiply by 50%.

** To compute the 1st year’s depreciation, divide the Bonus Depreciation amount ($150,000) by 1/7 or 14.29% (7 year depreciation). 

Example 2 - $1,000,000 New Press Depreciated Over 7 Years (Straight-line method)

The second example sets out a scenario based on $1,000,000 of total equipment purchases in a calendar year, which exempts the company from tax deductions under Section 179 but still allows it to take advantage of the new “Bonus” Depreciation regulations.

Section 179 Deduction

$ 0

Extra 50% Depreciation Bonus $500,000
Regular 1st Year’s Depreciation (14.29%) $ 71,450
Total 1st Year’s Depreciation $571,450
NET COST AFTER THE 1ST YEAR $428,550

Of course, the above examples are merely estimates and are meant to explain how these new tax regulations work in a general sense. As individual tax situations vary, companies considering equipment purchases should always consult their accountants to confirm their eligibility for tax benefits under these new laws.

InsideFinishing would like to thank Dave D’Arco with RCA Capital and Michael DeBard with Diversified Graphic Machinery (DGM) for their input on this topic. For more information, contact RCA Capital at (201) 646-0070 or DGM at (732) 933-4865.