Two Good Reasons to Think of Taxes Now

Target Audience: Manufacturing and Development Companies, M&D Industry, Management Personnel, Strategic Decision Makers, Accounting & Consulting Firm Interest, Tax News and Business Updates Interest

The end of the year is fast approaching, which means it’s a good time for manufacturers to take stock of their financial and tax situations. Your company’s taxes aren’t due for a while, but you may be able to make them less painful if you act before year end.

Some standard year end strategies have withstood the test of time and remain as valid today as in years past. For example, it’s generally still a good idea to defer as much income as possible to next year and to pay as many bills as possible before Jan. 1.

The big news this year is that the Economic Stimulus Act of 2008 offers some one-time-only opportunities to save on your taxes. The act offers a 50% first-year bonus depreciation for businesses of any size. And it nearly doubles the limit on Internal Revenue Code Section 179 expensing for smaller companies.

Depreciation on Steroids

If you acquire and place in service new equipment before the end of the year, you can depreciate 50% of the purchase price the first year. That’s in addition to the percentage of the remaining basis that you’re already able to depreciate according to regular IRS rules. So, for example, if you buy a $100,000 forklift before Jan. 1, you can depreciate $60,000: $50,000 under the Economic Stimulus Act and another 20% of the remaining $50,000 in basis.

Bear in mind that you must buy the equipment new, and it must be depreciable over 20 years or less. And simply buying the equipment isn’t enough. In most cases, it must be placed in service before Jan. 1, 2009.

Expense at Will

The new law also breathed significant new life into the Sec. 179 expensing election. For 2008, smaller businesses can expense, rather than depreciate, up to $250,000 worth of business equipment and software put in service by year end.

Don’t get too carried away, though. If you buy more than $800,000 in equipment this year, your Sec. 179 deduction will start to decrease. For every dollar over $800,000 you spend, your deduction decreases a dollar. Thus, if you buy $900,000 worth of equipment, your Sec. 179 deduction will be $150,000. And if your equipment costs hit $1.050 million, you won’t be able to use the Sec. 179 deduction at all.

Remember, too, that $250,000 is the federal maximum. The state in which you operate may not have matched that increase, in which case you’ll need two sets of depreciation schedules — one for the IRS and one for the state.

Find the Best Fit

There is no one-size-fits-all approach to planning tax strategies for manufacturers. Much depends on your corporate structure and accounting method, which determine not only when and how your business income is taxed but also when it must be recognized. All manufacturers can, however, benefit from year end tax planning — particularly in 2008.

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