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David Rumsey Tax Talk
 
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John Wolcott, Editor
jwolcott@scbj.com
Dave Clark, Assistant Editor
dclark@scbj.com
Published: Friday, January 30, 2009

Big deductions possible for businesses in tax filing season

For tax years beginning in 2008, Congress gave taxpayers a lot to talk about. Quite often, for instance, clients ask me what this Section 179 thing is all about. Code Section 179 is an election that the taxpayer can make to deduct a large amount of the investment in the initial year the asset is put into service.

This allows the taxpayer to potentially deduct much more than what the IRS would normally allow with their normal depreciation schedules. The deduction applies for both new and used asset purchases by taxpayers other than estates and trusts.

The big deal for 2008 tax filings is that the maximum deduction has been increased from a 2007 amount of $125,000 to $250,000. The amount for 2009 at this point is only $133,000. Of course, there are some items to note before taking this deduction. For 2008, you do not qualify if your business purchases total over $800,000 in qualifying property placed in service that year. Qualifying property is defined as personal property in the active conduct of a trade or business.

Also, Section 179 cannot create or increase a tax loss. The election is limited to taxable income from all of the taxpayer’s active trades or businesses. The potential good news is the deduction limited by taxable income can be carried forward indefinitely.

SUVs are also under a special limitation of $25,000 when the gross vehicle weight is under 14,000 pounds for vehicles placed in service after Oct. 22, 2004. Therefore, it is important to verify the weight of the vehicle you are looking to invest in before pulling the trigger on the deal.

Finally, in regards to taking the Section 179 deduction, you may want to make sure in future years that the business use percentage of the asset will not be less that 5 percent. If business use falls under 5 percent, there is a requirement to recapture part of the Section 179 deduction, which can lead to increasing the taxpayer’s taxable income in that year.

The Economic Stimulus Act passed in 2008 also allowed for a Bonus Depreciation write-off equal to 50 percent of the basis in the property. This can be used along with the Section 179 deduction and it doesn’t have the income limitations that Section 179 does.

Once again, there is a time limit for property placed in service after Dec. 31, 2007 and Jan. 1, 2009. So for 2008 calendar tax years, as a business owner you may have an opportunity to take the basis of a piece of equipment and elect a Section 179 deduction, then a 50 percent depreciation deduction, then with the remaining basis take the normal IRS depreciation deduction.

Quick Tips: For 2009 the IRS has released the mileage rates as follows:

1) Business - 55 cents per mile

2) Medical & Moving - 24 cents per

mile

3) Charity - 14 cents per mile

It is always important to talk with your advisor about the best way to tax plan for your individual tax situation. But for 2008, there may be a little more to be considered in the depreciation area.


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