Depreciation Opportunities Provide Immediate Cash Flow Benefits

Amidst all of the economic and marketplace challenges manufacturers and distributors face, opportunities exist to improve short-term cash flow by claiming larger depreciation deductions.

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Some of those depreciation deductions are available to all corporate taxpayers, while others are applicable to more specific entities or industries.

The Economic Stimulus Act of 2008 allows companies to immediately expense—rather than claim annual depreciation allowances—up to $250,000 under section 179 of the United States Internal Revenue Code for tax years beginning in 2008. That expense total applies to overall investments ranging up to $800,000 on qualified property placed in service after Dec. 31, 2007, and before Jan. 1, 2009.  Prior to 2008, the amount that could be immediately expensed was $128,000 on investments costing up to $510,000.

That $250,000 expense total may enable smaller companies to immediately deduct the full cost of equipment or machinery purchased in 2008, without requiring an alternative minimum tax (AMT) adjustment. The additional section 179 benefit, however, only applies to the 2008 tax year.

Major provisions of the 2002 and 2003 Federal Tax Acts allowed companies to claim an accelerated bonus deprecation deduction up to 30 percent or 50 percent of the cost of tangible property. Those provisions were enacted to help companies recover from the economic aftermath of the 2001 terrorist attacks, and covered property placed in service before Jan. 1, 2005.

Within the Economic Stimulus Package of 2008, a new accelerated bonus depreciation incentive allows taxpayers to claim a first-year 50 percent depreciation deduction for qualified property placed in service after Dec. 31, 2007, and before Jan. 1, 2009.

Specific Opportunities

To support the Modified Accelerated Cost Recovery System (MACRS), general asset classes were issued in 1987 for office furniture, computers and other items. Specialized trades and industries were also given their own asset designations and specific cost recovery periods, with distribution and retail companies at large getting the 57.00 classification. For depreciation deduction purposes, that classification specifies a five-year asset recovery life. If an affected company has not been following that schedule, immediate tax benefits can be gained by switching to that five-year span.

A distributor, for example, may have been taking depreciation for racks, forklifts, storage and packing equipment, and other assets based on a seven-year recovery life. That distributor can claim—as a decrease in taxable income—the difference between what it took for depreciation on a seven-year span and what would have been available if it had taken depreciation based on a five-year recovery life.

Such a switch in depreciation methodology does not require Internal Revenue Service (IRS) approval before the end of a tax year, and is regarded as part of the automatic method change consent procedures purview.

Various depreciation options are also available for taxpayers operating within specific industries, and companies need to be aware of such opportunities. Aerospace manufacturers, for example, retain rotable spare parts, such as blades and engines, for use in various production and quality assurance processes. The IRS allows those companies to classify those spare rotable parts as fixed assets, rather than inventory. That results in greater depreciation deductions.

Higher immediate depreciation will not resolve all of the varied difficulties companies may face, but the improved cash flow provides immediate relief—relief that may enable companies to sustain themselves and confront long-term challenges.

Philippe Simoens, CPA, psimoens@weaverandtidwell.com, is a Tax Senior Manager for Weaver and Tidwell, L.L.P.
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