As noted in Robert Grace's recent story (July 7, Page 8), it appears many manufacturing businesses are unaware of new legislation that offers significant potential federal income-tax benefits over the next couple years. I'm referring to the recently enacted Jobs and Growth Tax Relief Reconciliation Act of 2003, which relates to the purchases of machinery and equipment.
To stimulate the economy, two important tax law changes were built into the act to give businesses an incentive to buy new machinery and equipment. Specifically, it increases the amounts a business can deduct or expense on an accelerated basis with respect to newly purchased property.
For businesses in need of new equipment for expansion, replacement or modernization, the potential tax savings of these write-offs can help fund, and so justify the purchase.
Prior to the act, taxpayers generally were able to take a first-year ``bonus'' depreciation deduction equal to 30 percent of the cost of certain property purchased, or leasehold improvements made prior to Sept. 11, 2004. This was in addition to the depreciation deduction available for the balance of the cost of the property. The act extends the time period for the first-year ``bonus'' depreciation deduction and increases it to 50 percent of the cost of certain property. To qualify, a business must buy and put into service qualifying property after May 5, 2003, and before Jan. 1, 2005. However, property subject to a purchase contract prior to May 6, 2003, will be entitled only to the 30 percent first-year ``bonus'' depreciation.
Also, prior to the act, a business generally could elect to expense, subject to a phaseout amount, up to $25,000 of the cost of qualifying property (i.e., Section 179 property) in the year the property was placed into service.
The act increases the expensing to up to $100,000 per year, and the phaseout amount to $400,000 (both amounts being subject to inflation adjustments). To take advantage of this expensing election, a business must buy and place into service qualifying property during any tax year beginning before Jan. 1, 2006, and elect to take the expense on its tax return for that year.
This benefit is phased out, on a dollar-for-dollar basis, for taxpayers who place into service more than $400,000 of Section 179 property in a taxable year in which the expensing election is made, with the benefits completely phased out at $500,000. Consequently, this provision will benefit businesses needing modest amounts of equipment.
Because both the increased ``bonus'' depreciation deduction and expensing election are set to expire by the end of 2005, businesses should consider taking advantage of these provisions before they sunset and revert back to the pre-act amounts.
Tracanna is a member of the polymer industry team at the law firm of Benesch, Friedlander, Coplan & Aronoff LLP in Cleveland.