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The 2003 Tax Law Provides Temporary Tax
Incentives For Businesses To Buy Equipment
By: Larry Davis

As some of you may know, there has been a change in the way companies can write off, ( depreciate ) new equipment that they purchase. In speaking with a number of people, I have found a general lack of understanding in regards to this new law. In an effort to put something together in plain English, I contacted Michele Hennessey, Legislative Assistant in Congressman Bill Shuster's Office for help. She was kind enough to send me the following information.

The 2003 tax law provides temporary tax incentives for businesses to buy equipment, the following is summary information (taken from Congressional Quarterly Weekly June 7, 2003) for each provision. Again, I would advise that you speak with your accountant regarding your businesses specific situation. I hope that this information is helpful.

Bonus Depreciation
Under current law, a business can deduct the cost of purchasing certain equipment over a number of years through depreciation deductions. The amount that may be deducted each year is determined under the "modified accelerated cost recovery system," which specifies how costs for different types of property can be recovered. The recovery period for most personal property is 3 to 25 years. The tax bill signed into law in March 2002 (PL 107-147) provided a temporary additional first year depreciation deduction of 30% for capitol assets or property that generally have a recovery period of 20 years or less, and were purchased since September 11, 2001. The additional 30% depreciation bonus was applicable for property purchased through the end of 2004. The 2003 law increases the first year depreciation bonus from 30% to 50% for property purchased after May 5, 2003, and before the end of 2004.

Small business expensing
Under "Section 179" expensing rules, small businesses previously could deduct the full value of business equipment purchases of up to $25,000 in the first year, instead of using depreciation schedules and deducting the cost of the equipment over a specified number of years, as described above in the bonus depreciation. To be eligible for the full $25,000 a year deduction, a company could buy up to $200,000 of equipment, such as machinery and furniture, each year. Real estate or building structures did not qualify. For every dollar a small business spent above $200,000, the annual deduction was reduced. In addition, the amount expensed cannot exceed the taxable income of the business for that year, but unused amounts could be carried forward to future tax years.

The new tax law temporarily increases the annual deduction from $25,000 to $100,000 for equipment purchased in 2003 and raises the limit on total equipment purchases from $200,000 to $400,000. Both amounts are indexed for inflation in 2004 and 2005. The 2003 tax law adds off-the-shelf computer software to the list of equipment that qualifies for the deduction. In 2006, the deduction returns to $25,000.

I hope this information is useful to you. I am not an accountant, but if I can be of any help, please feel free to give me a call.

Larry Davis
Midwest Regional Manager
Boy Machines Inc.
House Chairman SPE
262-245-5755
boymachinesSPE@charter.net

2004
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