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by Renee Fellows

June 30, 2008 — Spring cleaning often raises the question about what business owners should do with assets that are no longer useful. The three ‘S’s of assets are generally, sell, scrap or save (retire), but each action comes with its own set of business liabilities and deductions; and the IRS will be keenly interested in the financial end result. The new 2008 Economic Stimulus Act includes several provisions that will benefit businesses by providing enhanced expensing and depreciation provisions for equipment purchased and placed into service during the year. The idea behind the bill is that the stimulus will help business owners continue to purchase equipment and grow their companies as well as injecting additional money back into the economy.

Selling Your Assets

If you elect to sell, scrap or otherwise dispose of your asset, first consider how long you have owned it. Short term assets are considered anything held for less than one year. Any related gains from the sale of a short term asset will be taxed at the individual’s or business’s ordinary income rate. For items held longer than a year, the IRS considers these to be long term assets. The good news is that these assets are taxed at a lower rate and any casualty losses on the property can be deducted.

When you have a loss (or gain) from the sale, scrapping or other disposal of the asset, you’ll need to use the following calculation to determine the amount of the gain or loss:

Gain / loss = adjusted tax basis – net proceeds on the sale + improvements / additions

To receive the most from this deduction, it’s imperative that you fully understand the tax ramifications of disposing assets. Any gain or loss from the disposition of an asset is reflected as the adjusted tax basis. The adjusted tax basis includes the original property cost, plus the cost of any improvements or additions, minus depreciation or casualty losses.

50-Percent Special Depreciation Allowance

For assets purchased and placed into service in 2008, the Economic Stimulus Act allows trades or business to depreciate an additional 50% of the cost of the assets. The types of property included will remain the same and include 1) tangible property that had a recovery period not exceeding 20 years; 2) purchased computer software; 3) water utility property; and 4) qualified leasehold improvement property. The original use of the property must begin with the taxpayer. The bonus depreciation will be allowed under the Alternative Minimum Tax (AMT).

Computers are often a popular area in a small business to be included as a depreciable asset. Let’s consider that you started the year by purchasing a PC laptop for $1000. This purchase falls into a class of equipment that must be depreciated over five years. Using the Section 179 expense limitations, a business owner can elect to write-off any portion of the laptop in year one and then take the remaining balance over the next five years. While the qualifying purchases did not change for 2008 under the Economic Stimulus package, the expense limits did increase from $128,000 to $250,000, and the 2008 phase-out threshold was also increased from $510,000 to $800,000. Should you decide to depreciate the item instead of taking the Section 179 expense election, the depreciation deduction would be $200 (at 20%), and your adjusted basis after year one would be $800 ($1,000 - $200). If you then decide to switch your office over to Macs and sell off your PC-based laptop for $900, then you would have a $100 taxable gain. However, in some instances, if you trade property for other business property of the same asset class, you don’t need to recognize a gain or loss. In this situation says the IRS, you’ll be using a “nontaxable like-kind exchange, in which the tax basis of the old property becomes the tax basis for the new property.” These are often very complicated rules, so speak with your tax advisor before trying to use this type of deduction.

Proceeds from the sale can include cash in the sale, the fair market value of any property or services, the value of an existing mortgage, loans or debts assumed. The value of an existing mortgage can also include deductions for a broker’s commission, appraisal fees, advertising expenses, title insurance and transfer or stamp taxes.

In 2003, Congress decreased the maximum dividend and capital gains rates for most individuals and businesses from 20% to 15% for qualifying taxpayers. An additional decrease is available for taxpayers in the 10-15% tax bracket. The Tax Increase Prevention and Reconciliation Act of 2005 extends these cuts until December 31, 2010. Once this legislation expires, the tax rate will readjust back to the 20% bracket.

Vehicle Depreciation

For vehicles placed into service in 2008, the total depreciation deduction (including the Section 179 deduction) you can take for a passenger automobile (that is not a truck or van) used in your business has been adjusted to account for the new 50% bonus depreciation by adding $8,000 to the luxury auto first-year depreciation limit. Taxpayers now can deduct up to $10,960 for a passenger vehicle (the customary $2,960 cap plus the $8,000 bonus). For trucks or vans, the maximum deduction that can be taken is $3,160 bringing the total to $11,160 (including the $8,000 bonus). If the vehicle is employed for both business and personal use, the figures can be prorated.

There is also an Alternative Motor Vehicle Credit for qualified available for specific hybrid vehicles. Note that several new vehicle types have been added as well as several others being phased-out. The most recent vehicle additions include:

• Chevrolet Tahoe Hybrid (2WD and 4WD) $2,200.00

• GMC Yukon Hybrid (2WD and 4WD) $2,200.00

• Saturn Vue Green Line $1,500.00

• Chevrolet Malibu Hybrid - $1,300.00

• Saturn Aura Hybrid - $1,300.00
  (a full listing is available at www.IRS.gov/newsroom/article/0,,id=161076,00.html)

The credit operates on a sliding scale based on the number of vehicles sold up to 60,000. Original purchasers of these vehicles may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records the sale of the 60,000 th vehicle. For the second and third calendar quarters after the quarter in which the 60,000 th vehicle is sold, taxpayers may claim 50% of the credit. The fourth and fifth calendar quarters will allow taxpayers to qualify for 25% of the credit. No credit will be extended after the fifth quarter.

Did you know…?

According to the IRS, “a taxpayer may not use the business standard mileage rate (50.5 cents per mile in 2008) for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS), after claiming a Section 179 deduction for that vehicle, for any vehicle used for hire or more than four vehicles simultaneously.”

Insider Tip

The Tax Increase Prevention & Reconciliation Act of 2005 also allows for the “treatment of the sale or exchange of self-created musical compositions or copyrights as the sale or exchange of a capital asset.” Taxpayers can use this deduction after May 17, 2006 up until December 31, 2010.

Don’t tread tax laws lightly. Mid-year is a great time to review your business’ books and plan for purchases that will improve your end-of-year tax situation. If you have questions or concerns about the acquisition or sale of property, talk with a Fidicual Advisor by calling 866-Fiducial or visit the web site at www.Fiducial.com.

Renee Fellows is the owner of ClearPoint Marketing Communications in Derry, New Hampshire. She works with small business clients to develop marketing and public relations strategies that bring business and customers closer together. She can be reached at 603-434-9433 or via email at Rfellows@oneclearpoint.com.

Whatever your small business needs, your Fiducial tax and financial professional can analyze your situation and recommend an appropriate action plan. To locate a Fiducial office nearest you on fiducial.com, see the Zip Code Locator located in the upper right hand corner of the page. Do you have a particular topic that we should be writing about that can help your business? Please send your suggestions to: Howard.Margolis@Fiducial.com.

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