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ARRA

2009 American Recovery & Reinvestment Act (ARRA)

moneyOn February 17, 2009, the American Recovery & Reinvestment Act (ARRA) was signed into law by President Obama in an effort to jump start the economy and to encourage corporate America to grow, become more efficient and invest in themselves. This Bill allowed the generous tax incentives we enjoyed in President Bush’s Stimulus packages to be extended through 2009.

Section 179: This deduction allows companies to deduct much of the purchase price of qualifying equipment financed or purchased in 2009 from this year’s profits! Here’s how it works... typically a company would write off the acquired financed/purchased asset over a period of years; this tax gift allows a company to write the asset off this year!

It’s important to know that there are limits...

  • The company spends up to $800,000 in equipment
  • The equipment is new or used and is purchased and installed in 2009
  • Companies can expense up to $250,000 in purchases as long as they do not spend over $800,000. For every $1.00 over the $800,000 spent, $1.00 is taken from the $250,000 tax benefit. (I.E. If a company spends $801,000, they could only deduct $249,000)

Bonus Depreciation: This is a depreciation bonus of 50% on new equipment (not used). It too has guidelines:

  • The deduction is to be taken after Section 179’s deduction
  • New equipment only
  • The asset is manufactured, constructed or produced either by the taxpayer or for the taxpayer after December 31, 2008 and before January 1, 2010
  • The asset must have a depreciable period of 20 years or less
  • Most software is eligible (see your CPA for more details)
  • The company can not use the depreciation bonus or Section 179 to write the profits down to a negative income

Though the asset has to be installed and in service by 12/31/09, the Bonus Depreciation will be allowed for certain property placed in service in 2009 and 2010. To do so,

  • The asset has to have a recovery period of at least 10 years
  • Is subject to the Uniform Capitalization Rules (Section 263A- see your CPA)
  • Must have a production period exceeding one year and cost more than $1 million.


Example: XYZ Corporation purchased equipment costing $725,000
Section 179, Depreciate the first $250,000
  <$250,000>
Subtotal
  $475,000
Depreciation Bonus (50% of Balance)
  <$237,500>
Subtotal
  $237,500
Standard 1st Year Depreciation is 20%
  <$47,500>
*Remaining Balance
  $190,000
Total Amount Depreciated in 2009
  $535,000 (74% Write Off In The 1st Year!)
Assuming 40% Tax Bracket, XYZ could then hold onto $214,000 ($535,000 x 40%) the first year and use this money for other production costs. *Remaining Balance is depreciated over the remaining useful life of the asset

 

The economy will turn around. Many are taking advantage of the low rates and tax incentives and making their plant more efficient for today... and the future. Let us know how we can be of help to you.

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