Local business and tax advisers are telling companies to consider making software or equipment purchases before the end of the year.
A business tax credit for buying equipment, which was set to expire Dec. 31, has been increased and extended through 2011 with the recent passage of the Small Business Jobs and Credit Act.
Section 179 Tax Credit
• What it is: A business tax credit for buying or leasing equipment and putting it into service during the same year.
• How it works: Profitable businesses can deduct the credit on their tax returns to reduce taxable income.
• What changed: The tax credit limits were increased and the program was extended until Dec. 31, 2011.
• Old tax credit: Up to $250,000 for businesses that spend less than $800,000.
• New tax credit: Up to $500,000 for businesses that spend less than $2 million.
• For more information: http://www.irs.gov/publications/p946/ch02.html#d0e1927.
But additional benefits are now available to those who take advantage of the credit this year.
Businesses can now deduct up to $500,000 from their federal income taxes for equipment and software they buy or lease and then put into service under Section 179 of the tax code. The new credit is double what the law allowed when limits were increased under President George W. Bush’s Economic Stimulus Act of 2008 and President Barack Obama’s extension of the act in 2009.
Businesses that spend more than $2 million on equipment for the year aren’t eligible for the full deduction. But that limit, too, has increased. Previously, the full deduction was available only for companies spending more than $800,000. Those that spend more than the limit can still claim a reduced tax credit. (For details, consult the IRS or your tax adviser.)
Raising spending limits and boosting the maximum tax credit has made more medium-size to large businesses eligible to take advantage of the credit in 2010 and 2011, said Ryan Greear, a tax manager at the Frumenti, Lander & Wallace accounting firm in Vancouver. It is less meaningful for small businesses, since so few spend several hundred thousand dollars on equipment in a year, he said.
The 2011 tax credit extension also means those businesses that don’t have the cash flow to make equipment investments in 2010 can still benefit from a tax break next year, Greear said.
Without the recent vote, the credit would have reverted to its original limit, allowing companies spending less than $200,000 to receive a credit of up to $25,000.
Vancouver business consultant Albert Christensen is advising his clients that have been profitable in 2010 to buy or lease equipment before the end of the year to benefit from the extra cash in 2011 for hiring and expansion purposes.
“Now’s the time to make your investment if you’re in a position to,” said Christensen, a contract chief financial officer in Vancouver with Phoenix, Ariz.-based B2B CFO. Especially “if next year is looking like a better year,” he said.
It’s uncertain whether the larger tax credits will spur new spending, however, even though that’s exactly what Congress hoped for when it extended and increased the tax credit.
Kyocera Industrial Ceramics’ Vancouver plant will likely claim the extra tax credit in 2010 for its equipment purchases if it qualifies, said Pat Cotter, vice president of administration. But the tax credits didn’t sway the company’s decisions to buy equipment.
“None of our acquisitions are tax-driven. We would have made the acquisitions whether the law passed or not,” said Cotter. “We’re doing it because we’re seeing increased business.”
Kyocera, which supplies equipment manufacturers in the semiconductor industry, has benefited from booming semiconductor chip sales, which are up more than 30 percent worldwide compared with a year ago, according to the Semiconductor Industry Association.
“Some companies might be on the edge of trying to decide (on purchases), and the existence of the tax law will push them over the edge to make the investment,” Cotter said. “It’s a speculative investment, it makes the (return) just that much more favorable. But that’s not our situation.”