If you don’t yet have a business, 2008 should be the year you start one! We’ve been talking a lot about the problems for real estate investors and real estate professionals with IRS audit and, at the same time, business owners have never had it better.
Starting in 2008, there are a couple of options on how much of a deduction you get for fixed assets that you buy for your business. In this case, we’re talking about personal property items, not real property. So, it would include computers, equipment, furniture and the like.
Typically you need to capitalize these items (consider them not immediately deductible assets) and then depreciate them over time. You can take a certain amount as an immediate deduction under Code Section 179. I remember back not too long ago when you could take a Section 179 deduction of $17,500 and we thought that was great!
The Economic Stimulus Act has increased that for 2008 up to $250,000! You are limited to an offset against income from a trade or business. In other words, you couldn’t take a Section 179 deduction against capital gains income, as an example. It has to go against trade or business income. If you don’t have enough, the excess with roll over to the next year.
AND there is even more. If the property you purchase is new, you can also take a bonus depreciation of 50%.
So, let’s say you buy property for $300,000. You have a couple of options in how you take a deduction.
Option #1: You take a Section 179 deduction of $250,000. The remaining basis ($50,000) can then have a bonus 50% deduction of $25,000 and then let’s assume the regular depreciation rate was 20%. So you get 20% of the remaining $25,000 or $5,000. What does that mean? You just got a deduction of $280,000.
Option #2: You take the bonus depreciation of 50% of $300,000, or $150,000. Apply the 20% regular depreciation rate to the remainder for $30,000. That means you’ll get a deduction of $180,000.
Typically, Option #1 would be the best bet provided you have enough business income to handle the offset.
One client of mine is using this terrific tax break to start a new business in 2008. He can get 100% financing for new equipment, so it won’t be any cash out of his pocket. He still gets the deduction to offset his salary which means a big refund.