Benefits for Small Business from the Economic Stimulus Plan

Two major provisions allow for new investment tax write offs

There’s been a lot of talk around an economic stimulus plan over the past few months, but what exactly does it mean for small businesses, now that the plan has been passed? Upon closer look it can mean quite a bit. While individual tax rebates are the plan’s centerpiece, provisions aimed at spurring job creation and offering businesses tax incentives for equipment purchases are what savvy small business owners should investigate.

Although individual tax rebates are getting all the media headlines, the biggest impact could come from the new rules on business depreciation and equipment write offs. The package includes two major provisions that directly benefit businesses:

• First, Congress is doubling the amount small businesses can write off their taxes for new investments made in 2008 - from $125,000 to $250,000. That means an extra $125,000 in value can be written off right away, rather than depreciated over time. It also lifts the cap on businesses eligible for the deduction, expanding it to businesses with sales up to $800,000, up from the current $500,000.
  
  
• The second prong in the stimulus package is called the “bonus depreciation” provision, or accelerated depreciation. This allows businesses to invest in new plants or equipment and to write off 50% of the investment in 2008.

Here’s how it works:

If a company spends $750,000 on new equipment in 2008, it could fully write off the first $250,000 in value (provision 1). The balance would then be written off at a 50% rate (provision 2), meaning the remaining $250,000 in value would be depreciated. So the first $250,000 would be a write off, as well as the next $250,000, plus the first year’s depreciation – say, $35,000. And if a business spends less than $250,000, then it can write off the entire amount which means avoiding the hassle of keeping depreciation records for the next 5 -7 years.

For many small business owners this will allow a 100 percent deduction for most of their normally expensed purchases such as office equipment, machinery, vehicles and the like. And in most cases the deductions are allowed even if the items are wholly or partially financed. So this may be the perfect time to invest in your IT infrastructure and All Covered can help.

Ultimately the benefit to small businesses will be a lower taxable income and lowered tax burden. Businesses will be encouraged to invest now rather than wait a few years. Add in the indirect financial benefit from consumers spending their individual tax rebates, and the benefit from the economic stimulus is looking very promising.

The above article is purely informational and should not be construed as legal advice. We recommend that you contact your tax advisor or CPA for specific details on how the tax incentives can be applied to your company or organization.