Extended tax incentives provide the opportunity to get more value from 2009 packaging machinery purchases. The American Recovery and Reinvestment Act of 2009, which was signed into law in February, extends the bonus depreciation and expense deduction tax incentives adopted in 2008. The incentives encourage capital spending for items such as packaging machinery by providing a bonus depreciation on capital purchases for 2009 and by raising deduction amounts.
The accelerated depreciation provision gives companies a 50-percent bonus depreciation on new equipment placed in service during 2009 that would normally be depreciated over many years which, in effect, allows companies to realize improved cash flow. All companies can take advantage of the bonus depreciation.
The increased deduction raises the limit on expenses that businesses can deduct from annual income—from $128,000 to $250,000—with a total cap of $800,000. You may have heard this referred to as Section 179 of the tax plan. Taxpayers must have taxable income to take advantage of the deduction. Deductions cannot be used to reduce taxable income below zero.
Businesses can take advantage of both of these tax breaks, taking a deduction for the first $250,000 in equipment bought this year, and then the 50 percent bonus depreciation on the rest. Deductions are allowable even if the purchases are wholly or partially financed. These incentives particularly benefit small and mid-sized companies that have an opportunity to make investments that otherwise would be delayed or impossible to make this year.
How the economic stimulus benefits your company: Capital investments by definition are undertaken with an eye on long-term expansion or upgrades to existing production capacity.
If you are considering expanding a plant or making investments in equipment, the stimulus package provides help in paying for it by improving cash flow.
Here's an example:
If your company buys a machine that costs up to $250,000 in 2009, you can deduct the total cost of the equipment. If the equipment costs more than $250,000, but your company spends less than $800,000 on capital equipment during 2009, your company can also take advantage of the bonus depreciation. In this scenario where both incentives can be used, a $300,000 machine with a five-year depreciation would qualify for a $280,000, first-year deduction (93 percent of the cost); and a $500,000 machine could qualify for a $400,000, first-year deduction or 80 percent of the cost.
Lowering taxable income
With these incentives, your company can lower its taxable income and lower its tax burden. Companies that take advantage of the tax incentives early in the year may also get some benefits with their estimated tax payments as they build the incentives into their financial plans for the year. It pays to take advantage early. Another reason to take advantage early is to prevent an end-of-year scramble to meet the “in service by 2009” provisions of the incentives.
With the increased deductible to $250,000 many packaging equipment solutions are fully deductible. Companies planning to take advantage of the new tax incentives should consult their tax planner to fully understand the benefits. However, for most companies considering a new equipment purchase, this is an opportunity to strike now, before the end of 2009, to receive the value of new packaging equipment, plus the added value and quicker return on the investment offered with the tax incentives.
This article was prepared by Pro-Mach, a leading provider of integrated packaging products. Pro-Mach provides equipment, training, installation and parts for primary packaging machinery, end-of-line packaging equipment and identification and tracking. For more information, visitwww.ProMachInc.com.