NEW in 2009! Stimulus bill includes provisions to extend both accelerated depreciation and Section 179 write-offs as detailed below. Click here for latest update.
There was more to the Economic Stimulus Act than those tax rebate checks earlier this year. Included in the Economic Stimulus Act were two provisions to help small businesses. So far, these opportunities are only available in 2008, so be sure to check with your tax professional to see if you qualify.
These provisions did not receive as much press as the rebates did. But, overlooking these provisions could be a costly mistake. Here is what you need to know to take advantage of the new law.
Leasehold Improvements
If you made any leasehold improvements for your salon/spa or distributor retail store this year, you may be eligible to take advantage of some sizeable benefits.
Before the Stimulus Act, leasehold improvements were depreciated and deducted over 39 years regardless of the term of the lease. Here is the new law. For 2008, and 2008 only, the taxpayer can deduct 50% of the cost in 2008.
A couple of examples will show how important this can be for your business.
Example 1: Normal Law
Hairball Beauty spent $78,000 for a major remodel (not including fixtures and equipment). Under the normal laws, Hairball Beauty will be able to deduct $2,000/year ($78,000 ÷ 39 years). Assuming a 33% tax bracket, Hairball Beauty will save a measly $660 per year for 39 years.
Example 2: Stimulus Act
Same facts as Example 1, except that Hairball Beauty did the remodel in 2008. Because of the Economic Stimulus Act, Hairball Beauty can deduct 50% in 2008, plus normal depreciation on the remaining 50%. So in 2008, Hairball Beauty has a write-off of $39,000 (78,000 x .50) + $1,000 (39,000 ÷ 39 years). This causes a tax savings of $13,200, plus $330 for the next 38 years.
There are some specific rules that must be followed, so make sure you check with your tax advisor for the best advice.
Fast Write-off of Equipment
Another Stimulus Act enhancement enacted by Congress is a higher deduction if you purchased equipment. This is commonly referred to as a "Section 179 Deduction." The deduction allowed in the pre-stimulus law was quite generous, so this may or may not impact your business.
Under the pre-stimulus law, if you purchased equipment you could elect to write off up to $128,000 of business equipment in the year that you placed the equipment in service, versus depreciating the equipment over 5 to 7 years. The Stimulus Act increases this amount to $250,000 for 2008.
If you made some major equipment purchases in 2008, this could provide you with a large tax write-off.
Once again, there are some detailed rules that you must focus on, so contact your tax advisor to see how this fits your fact pattern.
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Larry Kopsa CPA is a partner in Kopsa Otte CPAs. Larry is a frequent speaker at beauty industry programs.
Disclaimer: The information provided does not constitute legal, tax, accounting, or financial advice and is offered as an information service only. Those seeking specific advice should contact a professional advisor. No liability whatsoever is assumed in connection with the use of this information.
