Researching tax changes can be extremely boring, but it is essential that you understand how the changes affect your tax situation.  Even if you have a qualified tax consultant do your taxes, it is a good idea to at least get an idea of what it is all about.

Trying to understand the IRS tax rules and regulations is very difficult. Some are even up for interpretation. Just because someone is a CPA or does tax preparations, it does not mean they are up to speed on the tax changes made by the IRS.

For 2008, there are over 11 categorical tax changes for businesses. Below we will discuss just one of those.  If you are a business owner and buy vehicles or equipment you may be able to take advance of this tax change. It is called the Section 170 Deduction.

First we need to understand what the Section 179 Deduction Is
The Section 179 Deduction of the IRS code allows business to deduct the FULL purchase price of equipment (qualifying) that you either purchases or financed, during that tax year.

The idea behind this deduction is to promote businesses by investing in themselves by buying equipment.

The full purchase price of “qualifying equipment” can be deducted from your gross income.  Some folks call it the “Hummer or SUV Tax Loophole”

Here is an example of how it works:
Let’s say you buy a $50,000 vehicle for your business. In the past, it would usually be written off over a period of say, five years. So if it cost you $50,000. You could write off $10,000 over the five year period.

But now under the tax change, you can write off the full purchase price in the year you purchase it, up to $250,000.  However, there is a cap of $800,000 for the total amount of the equipment purchased.  After that, the deduction phases out dollar for dollar.

“But that’s not all…”

Businesses that exceed the $250k deduction can take a bonus depreciation of 50% on the amount that exceeds the limit. And then also take normal depreciation on the rest.

Do You Qualify for Section 179?
All businesses that purchase or finance less than $800,000 in business equipment should qualify for the Section 179 Deduction. In addition, most tangible goods qualify for the Section 179 Deduction. But remember, the purchases had to be made in 2008 (Jan 1 - Dec 31).

Here is a better example:

Let’s say that on March 1, 2008, you bought “qualifying equipment” with a total purchase price of $500,000.

The 1st Year Write Off is $250,000
The Bonus First Year Depreciation is $125,000 ($500,000 - $250,000 = $250,000,  50% of $250,000 = $125,000)
Then the balance is depreciated over 5 years.  So $125,000/5 years = $25,000. And you can take $25,000 additional deduction in 2008 for the first year depreciation.

The tax savings is $250,000 (1st year write off) + $125,000 (1st year bonus @ 50% of balance) + $25,000 (1st year depreciation) = $400,000 Total First Year deduction.

Understand, that your tax rate is then applied to come up with the actual savings.

Hope you got all that!