Save Even More on Your Taxes By Buying Alpacas in 2008!
The Economic Stimulus Act of 2008 has significantly increased your purchasing power when it comes to buying alpaca breeding stock under the Tax Code Section 179. The deduction limits have almost doubled for 2008! This makes investing in alpacas this year a very attractive opportunity.
Note the following news from the IRS website:
IR-2008-22, Feb. 21, 2008
WASHINGTON — In addition to providing stimulus payments to individuals, the Economic Stimulus Act of 2008 provides incentives to businesses. These incentives include a special 50-percent depreciation allowance for 2008 purchases and an increase in the small business expensing limitation for tax years beginning in 2008.
50-Percent Special Depreciation Allowance
Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property over several years. It is an annual allowance for the wear and tear, deterioration or obsolescence of the property.
Under the new law, a taxpayer is entitled to depreciate 50 percent of the adjusted basis of certain qualified property during the year that the property is placed in service. This is similar to the special depreciation allowance was previously available for certain property placed in service generally before Jan. 1, 2005, often referred to as “bonus depreciation.” To qualify for the 50 percent special depreciation allowance under the new law, the property must be placed in service after Dec. 31, 2007, but generally before Jan. 1, 2009.
To reflect the new 50-percent special depreciation allowance, the IRS is developing a new version of the depreciation and amortization form for fiscal year filers. The new form will be designated as the 2007 Form 4562-FY.
Section 179 Expensing
In general, a qualifying taxpayer can elect to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as section 179 property, after the relevant section in the Internal Revenue Code.
Under the new law, a qualifying business can expense up to $250,000 of section 179 property purchased by the taxpayer in a tax year beginning in 2008. Absent this legislation, the 2008 expensing limit for section 179 property would have been $128,000. The $250,000 amount provided under the new law is reduced if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $800,000.
So what does this all mean for the alpaca enthusiast?
Section 179 allows for immediate tax relief. This makes investing not only feasible, but also a financially sound decision. In many cases, your savings though tax relief will exceed your first year’s payments for the alpacas.
Section 179 is a small business incentive for capital spending. It is intended to give the economy a boost. It has a great impact on our business because alpaca breeding stock qualifies for this deduction.
Why would you want an accelerated deduction for your alpacas?
CPA Jonathan W. Kaplow states, “One of the golden rules of tax accounting for business is to defer the payment of taxes as far into the future as possible. One way to do this is to take every tax deduction as early as possible. If you buy depreciable property…you’ve paid out funds for that investment in its first year either by using existing cash or by incurring debt that must be repaid with interest.”
Section 179 allows businesses to elect to deduct the cost of a limited amount of eligible property purchased for use in a business in the year the property is placed into service instead of writing off the property’s cost over its depreciable life. “By electing to charge the property’s cost to expense, a business can receive a larger deduction on its taxes the first year of the property’s use. Considering the time value of money, businesses usually are much better off with this expense deduction: They pay lower taxes, retaining more funds for additional business use.” Kaplow explains.
There are some limitations to the use of Section 179. There are some limits to section 179 - the total cost of property that may be expensed cannot exceed the total amount of taxable income during the tax year. Businesses that use excess deductions to make their income go below the zero dollar point can carry forward those deductions for an unlimited number of years until there is a year when the company has positive income and it can be applied at that time.
What qualifies for Section 179?
To qualify as section 179 property, the property must be new or used tangible personal property acquired for purchase for use in a trade or business. Livestock qualifies. Machinery, furniture and equipment qualify. Property contained in or attached to a building (that is not structural) such as office equipment, signs, refrigerators, and computer software (off-the-shelf).
Generally, most movable assets qualify – but permanent structures do not qualify for Section 179. Even used equipment and vehicles qualify if they are new to you. In other words, if you acquire the equipment from a source other than yourself or an entity controlled by you, it should qualify. Specifically excluded are land and land improvements such as buildings. To ensure property qualifies, please reference IRS Publication 946.
How Can I Use Section 179 to My Advantage?
Alpaca Breeders and Potential Alpaca Breeders should have a strategy for using Section 179 to their benefit. For example, investors in the alpaca industry may want to complete key breeding stock purchases in 2008 while a larger dollar amount can be depreciated in an accelerated fashion. In addition, amounts that are not claimed as section 179 expenses can be depreciated at the regular tax depreciation rate. It may make sense to elect regular depreciation if the business will be in a higher tax bracket in the future. It also may not make sense to use section 179 for an asset that the business plans to resell at a gain.
Utilizing the section 179 deduction is a choice each business has to make. It is not done automatically. Kaplow comments, “The section 179 deduction can provide a substantial measure of financial relief for small businesses struggling to keep up with America’s rapidly changing economic environment. With the funds that become available more readily through this deduction, businesses can extend their budgets and other resources to become more competitive in their marketplace.”
These higher limits are good for 2008 only, and are specifically meant to encourage businesses to invest in themselves this year. Act now to take advantage of this substantial, new incentive! Contact us at Fairhope Alpacas for more information about business planning and financing to help you build your alpaca herd. Alpacas truly are the world’s finest livestock investment.
Fleecy Beaux and Belles for Your Portfolio
*This information is provided for informational purposes only and is not to be considered tax or legal advice. Each person’s tax situation is unique, and you should check with your tax professional for information that is tailored to your particular situation.
Jonathan W. Kaplow, P.C. C.P.A. Microsoft Small Business Accounting.
Internal Revenue Service at www.irs.gov