You’ve finally found business management software that’s sized right for your company – a simple yet powerful solution that allows immediate and complete access to business operations and customers’ activities. It’s easy to implement and easy to use. What could be better?
How about a decrease in your tax liability and more cash in your pocket?
In May 2003, President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act of 2003, which expands the depreciation bonus enacted under the Job Creation and Worker Assistance Act of 2002.
The Act of 2003 increases the bonus depreciation from 30% to 50% for qualified property placed in service after May 5, 2003 and before January 1, 2005. And effective January 1, 2003, the law also increases Section 179 business expensing levels from $25,000 to $100,000 and increases the eligibility cap from $200,000 to $400,000.
What does this mean for me?
We talked with a tax expert, Jerry Lerman, Managing Director of American Express Tax and Business Services. Lerman is emphatic. “It’s a real incentive for small and midsize businesses to spend on capital improvements. And businesses should really plan to take advantage of these benefits.”
Simply put, if you buy business software or hardware this year or next, you qualify for the 50% depreciation bonus. And you can get two bites of the apple. Depending on your overall capital spending, you can take an expense write-off of up to $100,000.
If you purchase business management software today, you gain all the efficiencies that the software delivers – starting right now.
Think about it: Be more productive, decrease your tax liability, and put cash in the coffers. It’s the law!
How does it work?
As Lerman explains, you should first establish your overall capital expenditures this year. This determines if and how you apply the Section 179 expense deduction. In any event, you can take the 50 percent bonus deduction and the standard 20% MACRS (Modified Accelerated Cost Recovery System) deduction this year.
Here’s an example. Let’s say you purchase business management software this year that costs $50,000 and hardware that costs $100,000. As we show in the tables below, the combination of the Section 179 expense deduction, bonus depreciation, and MACRS depreciation enables you to significantly reduce your taxable income.
The Section 179 expense and depreciation deductions mean that you can write off more of the cost of new software and hardware up front. If you buy software and equipment this year for $150,000, your total deduction is $130,000, which is over 85 percent of the purchase price. Without the Act of 2003, your deduction would be only $50,000. Quite a substantial difference.
Now for the fine print. Eligible property must be subject to MACRS depreciation rules. MACRS assigns different recovery periods to different types of property, ranging from three to 20 years. For example, straight-line depreciation for software is 3 years; for computers, five years.
In addition to the MACRS requirement, one of the following must apply:
- Must be computer software that is normally depreciated, which includes business management software packages
- Must have a depreciation life of 20 years of less, which includes computers and peripherals
Should I expense or depreciate?
You could decide to expense rather than depreciate your software and equipment purchases. Under the Act of 2003, you can expense up to $100,000 in software or equipment purchases as long as your total capital investment for the year doesn’t exceed $400,000.
But as Lerman explains, it’s not an either-or situation. Depending on what you purchase this year, you could do both.
Are there any “gotchas?”
It’s clear that the law benefits businesses that want to write off assets faster. A larger deduction can reduce income tax. However, before deciding to write off assets, do the calculations to compare how a faster write-off this year will affect future taxes. Just be aware that the overall amount you can depreciate isn’t increased and your future tax liability may be slightly increased.
How much time do I have?
To qualify for the 50 percent depreciation bonus and Section 179 benefits, you must purchase software or hardware and put it into service after May 5, 2003 (January 1 for Section 179) and before January 1, 2005.
What do you gain by waiting? “In a word, nothing,” states Lerman. Profit this year from all the advantages that business management software can deliver to your company. Put time and money to work for you right now.
What’s your advice?
We can’t offer any tax advice, and we can’t guarantee tax savings. For specific information about how the depreciation bonus and Section 179 expense deductions affect your company, contact your tax advisor or visit the IRS Web site at www.irs.gov
But if you think that you can’t afford to purchase business management software this year, think again. Run the numbers. Talk with a trusted advisor. Consider the benefits. And you’ll agree with Lerman that “This is the best thing that’s happened in a long time.”