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The Tax Effect of Timed Equipment Purchases

Jason A. Meyer

11-2008

Independently owned optical retail businesses or professional eyecare practices that are considering equipment purchases for their in-office laboratory in 2009 may decide to make those purchases before the end of the year 2008. The new Small Business and Work Opportunity Act (SBWOTA), among other things, eased Section 179 of the tax code. Under the new provisions small companies are able to deduct up to around $130,000 in 2008; with an inflation associated with the year 2007 base amount through the year 2010. The Economic Stimulus Act of 2008 increased this limit to $250,000 for 2008. The catch is that the deduction is limited to small companies, and taxpayers that purchase over $800,000 worth of equipment in the year 2008 would start to lose the tax benefit. Accordingly, for every dollar over the spending limit, the deduction would be reduced by the overage. This would, in effect, simply reduce the current deduction and increase the depreciable basis in the equipment purchased.

Therefore, a well planned purchase of equipment would include the purchase of up to $800,000 in 2008, wherein the first $250,000 of the purchase would be deductible by the company in the 2008. The same would apply for a single project such as reengineering and associated equipment. Certain expenditures in addition to the optical equipment can also qualify, excluding however, building expenditures and associated fixtures.

Also for 2008, bonus depreciation has been allowed at a 50 percent rate for qualifying property and works. This special depreciation allowance is allowed after any Section 179 deduction and before computation of regular depreciation deduction. Property that qualifies includes among other things tangible property depreciated under Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less including qualified leasehold property. The property must be acquired after 2007 and before 2009 and placed in service after 2007 but before 2009.

When making purchases in conjunction with associated Section 179 deductions, in-office lab owners need to also be aware that they must pass a taxable income limitation wherein the expensing deduction can not exceed the taxable income from the purchaser’s active trade or business. This limitation particularly comes into play where the company is a C corporation and the deduction resulting from the Section 179 purchases exceed the taxable income of the corporation. Therefore, before in-office lab owners take their often customary year end bonus, they should consider forgoing the bonus so as to not create a situation wherein the corporation’s Section 179 deduction is lost. By planning the purchases well, the corporation can have the deduction without the associated payroll costs to shareholder employees; and have the cash remain in the company that would have otherwise been distributed.

The result of a Section 179 tax deduction is in effect to use pretax dollars to make certain of your company's capital expenditures. That said, in-office lab owners should still strongly consider the economic factors (as addressed in earlier articles) and make the purchases only after considering the effect on the overall debt of their company. In-office lab owners should consult their tax professionals to determine their eligibility in participating in any of these potential tax incentives.

—Jason A. Meyer is managing director, HPC Puckett & Company in San Diego, Calif.

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