Fourth Quarter Machine Tool Depreciation

Accelerated depreciation in the fourth quarter of 2004 can provide significant tax shelter to many parts production job shops or tool and die shops, according to capitol equipment financing specialists at Makino, a global provider of advanced machining technology.

Operations that invest in new equipment technology and receive delivery before December 31, 2004, may see significant corporate and personal owner refunds in the spring of 2005. In some cases, the corporate tax savings/refund will offset the first year’s expenses associated with operating the machine.

After the terrorist act of 9/11, Congress passed a tax relief act in 2002 allowing companies that purchase new machinery to immediately depreciate 30 percent of the value of those acquired assets. The remaining book value would be subject to MACRS depreciation as per Internal Revenue Service guidelines. Additionally, the act permits a company to reach back five years (as opposed to three years) for a tax refund.

In order to stimulate the economy in 2004, Congress has passed President Bush’s jobs and economic growth tax relief bill. This bill contains a new 50 percent expensing allowance for machine tools and other equipment ordered between May 6, 2003, and Dec. 31, 2004, so long as it is placed in service by Dec. 31, 2004. This increases and/or replaces the temporary 30 percent expensing allowance enacted in 2002.

Additionally, small businesses (those whose equipment purchases of all kinds do not exceed $410,000) are permitted to depreciate the first $102,000 of an acquisition. Then, they can further depreciate 50 percent of the remaining basis of the machine and apply MACRS depreciation as per IRS guidelines to the remaining value. In other words, a qualifying small business that buys a $100,000 machine can expense it all in the first year.

A $200,000 machine could qualify for a $158,000 first year deduction, or 79 percent of the asset. A $300,000 machine could qualify for a $215,147 first year deduction, or 71.7 percent of the asset.