Easy Money: Evaluating the Tax Relief Act of 2010

Written By: Marvin Logan

Saving Money on Material Handling EquipmentThe Tax Relief Act of 2010 has an interesting implication to those contemplating the purchase of material handling equipment in 2011.

Section 179 of the IRS tax code was changed to allow businesses to deduct the FULL PURCHASE PRICE of qualifying equipment and/or software purchased or financed during the tax year.

That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the entire price from your gross income. In a nutshell, the changes for 2011 are as follows:

  • The 2011 deduction limit was raised from $250,000 to $500,000.  This is good on new and used equipment and includes software purchases like Warehouse Control Systems.
  • The 2011 limit on equipment purchases to qualify for the deduction was raised from $800,000 to $2 million.
  • Here’s the best part:  A “bonus” depreciation of 100% on new equipment purchases can be taken after the $500k deduction limit is reached.  This allows businesses that exceed the $2 million cap to write-off 100% of qualified assets IN THE FIRST YEAR.

For businesses that purchase equipment or software totaling $500,000 or less in 2011, the entire cost can be written-off on the 2011 tax return.  Instead of depreciating only, say 20%, the entire amount can be written-off in the first year, thereby reducing the tax burden of the company.  Furthermore, businesses that exceed the $2 million in capital expenditure threshold can take a bonus depreciation of 100% on the amount that exceeds the limit.

Wow, that is a huge incentive to encourage businesses to buy equipment this year.

Here are some examples to better explain the tax benefits:

Example 1:

Suppose your company purchases a conveyor system totaling $1,000,000 in 2011.  The new law would allow you to write-off $500,000 on your 2011 taxes.  Additionally, you can deduct the remaining value ($500,000) using the bonus deprecation provision; thus writing-off the entire purchase in 2011.

If your corporate tax rate is 35%, then the tax burden is reduced by $350,000 (0.35 x $1,000,000).  So the new conveyor system essentially cost you only $650,000 ($1,000,000 – $350,000)!

Example 2:

Tax Relief Act 2010 Example Two

I’m not a tax accountant, so you might want to check me out on this; however, I think I’m on base here.  Time is of the essence to take advantage of this tax law change as the new equipment has to be purchased by year-end.  With things heating up in the material handling industry and backlogs increasing, don’t get caught sleeping on this one!

Does your company plan on taking advantage of this tax break?  Why or why not?

Marvin Logan is Director of Consulting Services at Bastian Solutions. He and his team of consultants provide engineering studies, system simulations, slotting analysis, and system layout and design.

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