Coping With Changing Depreciation Rules
By Paul R. Pavich, Red Moon Solutions LLC
Everyone would like their tax bills reduced to compensate for
their investment in business assets. Normally such purchases must
be depreciated over many years. However, in 2008, the politicians
really are here to help. They are passing out tax breaks for business
investment, and here's how it works. Along with the stimulus checks
for individuals, businesses have been given two valuable incentives:
the Code Section 179 expensing provision has been enhanced, and
bonus depreciation has re-surfaced, benefiting virtually all businesses,
whether incorporated or not.
First, the expensing provision of Section 179 has been doubled to $250,000 and increases the investment threshold for the phase out to $800,000. This provision of the law allows a company to fully write off (expense) an asset in the year of purchase. This applies to property purchased and placed into service for taxable years beginning in 2008. Most small and medium-sized businesses will be eligible to take advantage of this change. However, due to the investment limitations imposed on the dollar amount of assets a company purchases in any given tax year, not all companies will be able to take advantage of this newly enhanced law.
Second, bonus depreciation has returned for the 2008 calendar year. Bonus depreciation allows a company to write off 50% of an asset's cost as an expense in the current year, via depreciation expense, in addition to the regular depreciation expense amount that is normally allowed. Eligible property that is purchased and placed in service after December 31, 2007, and before January 1, 2009, will be entitled to claim bonus depreciation. Keep in mind that bonus depreciation must be claimed for both regular and alternative minimum tax, although taxpayers also have the option to exclude an eligible asset class from claiming bonus depreciation.
These two areas of the tax law make grown CPAs cry and software developers
change professions. However, a well-established software company can manage
these changes and provide complete and reliable solutions on a timely basis
to their customers. These new law changes will not alter the filing of the
2007 calendar year tax returns; however, they will have an impact on the tax-planning
process for 2008 ... once the 2007 calendar year returns have been completed.
CPAs and those providing tax services have come to rely on their software solutions for providing specific answers to these types of questions. Even before the ink was dry on the newly signed bill, established software companies were poised to modify their software to incorporate the new rules and calculations into their solutions. Let's take a closer look at how these changes are analyzed and incorporated into the software.
As the details of the proposed stimulus package unfolded, it became apparent
that the Code Section 179 expensing limitations would be increased and that
bonus depreciation would be making a limited time comeback. The software company's
tax analyst began monitoring the bill's progress while laying out the tax logic
needed by the development team to begin their design work. It is the responsibility
of the tax department to provide the effective dates, rates and the desired
calculated results to the design team. The design team then lays out the programming
logic; the programmer then writes the code based on the design specifications.
It is at this important step that the tax analyst and the programmer work closely
together by testing the system for accurate and efficient handling. Team work
and specific industry knowledge are the keys to achieving the results that
CPAs not only require, but demand.
To amplify the working relationships between tax and programming, consider
the following two phrases: (1) "Property purchased and placed in service
for tax years beginning in 2008" and (2) "Property that is purchased
and placed in service after December 31, 2007, and before January 1, 2009." To
those that have never had the joy of experiencing the intricate details of
tax preparation, these two phrases may seem to say the same thing ... applies
to my assets purchased during the 2008 year. Not so – says the tax man!
First, the key to item one above are the words " ... tax years beginning
in 2008." Generally speaking, an entity's tax year begins on January 1
and ends 12 months later on December 31. These dates represent the time frame
within which the entity is doing business – so to speak. This is the most common
type of tax year, called a "calendar year," under which most businesses
and individuals operate. An entity can also have a "fiscal year," that
is, one that starts on a date other than January 1st and ends on the last day
of the twelfth month. It can have an end date or a start date shorter than
twelve months due to a business termination/combination – also called a short
tax year. As the new law applies to this particular situation (Code Section
179), the start date of an entity's tax year must begin on January 1, 2008,
or some other date before December 31, 2008.
Second, the key to item two above, are the words " ... purchased and
placed in service after December 31, 2007, and before January 1, 2009." This
represents a period of time when an asset must be purchased in order for the
new tax rules to apply. It is not dependent upon an entity's taxable year start
date.
For example, let's assume that a corporation has a fiscal year start date
of October 1, 2007, and an ending date of September 30, 2008. First, since
the taxable year starts in 2007, the enhanced Section 179 expensing limit will
not be allowed until October 1, 2008 – the start of its 2008 taxable year.
Prior to that, the 2007 current year limitations of $125K/$500K must be used.
Second, bonus depreciation will be allowable for eligible assets that are purchased
and placed in service any time from January 1, 2008, through December 31, 2008.
Using software to answer questions like the example illustrated above is no
longer a luxury. It is a necessity. As new laws are enacted, prior laws can
become obsolete, be retroactive to certain dates and be effective for prospective
dates only or any combination thereof. Reliable software has the ability to
remember all of the rules, whether old or new, and apply them on a consistent
and reliable basis.
When choosing your software, it is important to look beyond the software and
behind the scenes at the people who are providing the software, in order to
have confidence that the answers are correct, accurate and in line with the
level of service you require to maintain your professional practice.
Paul R. Pavich is the Director
of Tax and Accounting for Red
Moon Solutions LLC. He has over 30 years of experience in the field
of taxation and accounting. Paul has been working in the software development
business for the past ten years. Red Moon Solutions is a premier provider
of specialty software solutions including Fixed Assets Manager (FAM),
Like-Kind Exchange Matching (LKEM) and WorldPro, a solution that assists
human resources personnel manage international work assignments.
