In 2008 the U.S. economy took a nosedive. Although the country is beginning its slow climb out of one of the longest economic downturns since the 1930s, 2014 is starting to look like another disappointing year for the economy, based on new data reports.
In July, the Chicago Federal National Activity Index (CFNAI) reported that the national economic activity weakened in June with the index falling to a level of 0.12, while the three-month moving average worsened to a weak level of 0.13. The CFNAI (a monthly index designed to gauge overall economic activity and related inflationary pressure in the U.S.) signals that many will have to manage to do more with less by stretching their dollars and cents. The report also highlighted how personal consumption and housing continue to significantly underperform.
But, I know that just like the 1930s, we have a resilient U.S. economy. Our current government went to great lengths and took unprecedented action in a valiant effort to stimulate the economy. As households and families stretch their earnings a little further by curbing their household expenses to adapt to the environment, entrepreneurs and businesses will act no differently. They will become lean and understand the need to spend money and make use of tax breaks and incentives to stimulate growth and prosperity for their business and ultimately the economy. Like the old saying goes, you have to spend money to make money.
Over the past few years, bonus depreciation has become very popular among businesses even more so with the additional changes to broaden its applicability. It is a method of depreciation that allows businesses to accelerate expensing 50 percent of the cost of qualifying property in the year in which it was placed into service. Many entrepreneurs and businesses took advantage of the new set of economic stimulus that were enacted in 2008, renewed and subsequently extended to jumpstart and boost the economy. The aforementioned tax breaks offered many advantages to businesses in that it helped to reduce taxable income and thereby reduce their overall tax bill. This aided in keeping more cash flow in the bank account of businesses to fund operations, financing and invest in the economy through increased capital purchases, spending, hiring and other growth measures.
The IRS says that this special “bonus depreciation” allowance is available to all businesses and applies to most types of tangible personal property and computer software acquired and placed in service (in a particular year). It allows taxpayers to deduct 50 percent of the cost of qualifying property in addition to the regular depreciation allowance that is normally available on the purchase of capital assets for tax purposes.
Bonus depreciation has some great features for businesses. When applied correctly there is no limit as to the amount a business can spend on purchasing capital assets. In addition, if bonus depreciation creates a loss for the business, then the business is entitled to utilize the loss to offset other income. It cannot include purchases from a related party, received as a gift or inheritance. Although there are some exceptions: bonus depreciation can be used for new property acquired, capital assets with a useful life of 20 years or less and must be used more than fifty percent of the time for a business to qualify. Except for land, most purchases qualify such as buildings, machinery, vehicles, leasehold improvements, furniture, machinery and equipment.
At the stroke of the New Year in 2014, bonus depreciation expired and now requires Congress’ approval to continue. It is likely to be extended in 2014; therefore, the best advice is to consider for capital asset purchases around the third or fourth quarter of 2014 as you manage and review your financial, accounting and tax plan for the year.
As many households and families prepare to manage to do more with less and try to stretch their dollars and cents, this is no different for businesses and bonus depreciation may just be the way to do it.
Gerri Lazarre, CPA, MsTax is a certified public accountant and principal with TriMergeCPA and TriMergeTax in Miami, Florida. Lazarre specializes in providing professional advisory services in the areas of accounting, audit and tax planning to individuals, businesses and nonprofit organizations for more than 15 years. For more information, please visit www.TriMergeTax.com and www.TriMergeCPA.com. Connect with Gerri on social media at Twitter.com/TriMergeCPA, Twitter.com/TriMergeTax or https://twitter.com/GerriLazarreCPA