November 2 , 2008 - As the end of the year approaches, I'm considering buying more equipment for my business, but I'd like to know how much that may benefit me in reducing my tax liability.

Thanks to the Stimulus Act of 2008, most small businesses, and even moderate-sized businesses that don't have huge capital equipment needs, may be able to claim a full Code Sec. 179 expensing deduction for the cost of business machinery and equipment purchased in tax years beginning in 2008. The results: reduced effective costs for the assets, fewer assets to track for depreciation purposes, and no alternative minimum tax adjustment for property expensed under Code Sec. 179 . For unincorporated taxpayers (or those operating through a passthrough) there are other benefits: By using the expensing election to lower adjusted gross income (AGI), the taxpayers may be able to benefit from itemized deductions or personal exemptions (or other tax breaks) that otherwise would be limited or phased-out because of the taxpayer's AGI.

For tax years beginning in 2008, the Stimulus Act of 2008 has increased the Code Sec. 179 expensing election to $250,000. Plus, under the Act, the expensing amount is reduced only when $800,000 of expensing-eligible property is placed in service. Absent a law change, the amount that may be expensed under Code Sec. 179 for tax years beginning in 2009 will be $133,000, and the expensing limit will be reduced when more than $530,000 of expensing-eligible property is placed in service.

Under the expensing election, a taxpayer can deduct costs immediately, rather than depreciating them over several years. And, unlike depreciation subject to the mid-quarter or half-year conventions, a full expensing deduction is allowed regardless of when in the tax year the qualifying property is placed in service. For example, property placed in service on the last day of the tax year may qualify for full expensing. As a result, where possible, taxpayers should factor the annual expensing limit into their annual equipment-purchase plans.

The deduction is limited to taxable income from any of the taxpayer's active trades or businesses. This means that the taxable income limitation doesn't bar an expense deduction just because the particular business in which the property is used doesn't produce any net income. So long as the taxpayer has aggregate net income from all his trades or businesses, the deduction is allowed. Any amount that cannot be deducted because of the taxable income limitation can be carried forward to later years until it is fully deducted.

Any amount that can't be deducted because of the taxable income limitation is carried over to later years. As a result, taxpayers should consider making the expense election even in a year where no immediate tax benefit is derived from the election. This way the taxpayer's right to carry it forward to other years is preserved. Without the election, the taxpayer can recover the cost of the investment only through depreciation deductions.

Taxpayers should try to avoid buying and placing in service more than the ceiling amount of expensing-eligible property during the year, if it's possible from the business standpoint to defer additional purchases. Unused expensing deductions due to excess investments can't be carried forward.

To maximize the tax benefit to be gained through expensing, a taxpayer should make the expensing election for eligible property with the longest recovery period.

The increase in expensing deductions available to small business owners should help as we approach the end of this year, especially during these volatile times. Investing in the future will benefit everyone, and if that investment decreases your tax liability, so much the better.

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