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Category: Machinery
Volume: 25
Issue: 1
Article No.: 3944

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Tax Relief for New Equipment Purchases CASHFLOW & DEPRECIATION EXAMPLES

Depreciation Example

The following chart illustrates the depreciation benefits associated with the Jobs and Growth Tax Relief Reconciliation Act of 2003 for a new CNC panel saw and a new router that is purchased and installed July 1, 2004. The purchase price for the new equipment is a combined $200,000. The objective is to maximize first-year deductions.

Depreciation On A New CNC Panel Saw And Router
ACost Basis$200,000.00
B Section 179 deduction $100,000.00
C Remaining basis $100,000.00
D Bonus depreciation (50% x C)$50,000.00
E Balance to be depreciated $50,000.00
F150% DB – first year depreciation (10.71% x E)$5,355.00
G Total deprecation for 2004 tax year (B+D+F)$155,355.00
H Depreciation in 2005 (19.13% x E)$9,565.00
I Depreciation in 2006 (15.03% x E)$7.515.00
J Depreciation in 2007 (12.25% x E)$6,125.00
K Depreciation in 2008 (12.25% x E)$6,125.00
L Depreciation in 2009 (12.25% x E) $6,125.00
M Depreciation in 2010 (12.25% x E)$6,125.00
N Depreciation in 2011 (12.25% x E)$3,065.00
O Total lifetime depreciation $200,000.00

Cash Flow Example

The following chart illustrates the cash flow benefits and tax implications associated without and with the purchase and delivery of a CNC panel saw and router for a combined $200,000 starting July 1, 2004. It is assumed that the taxable income for the company is $300,000, at a 34% corporate tax rate for each year starting in 2004.

Cash Flow Benefits And Tax Implications
WithoutWith
MachineryMachinery
PurchasePurchase
A. Year 2004 Corporate Taxes$102,000.00$49,179.00
Year 2004 net profit after taxes $198,000.00$250,821.00
B. Year 2005 Corporate Taxes$102,000.00$98,748.00
Year 2005 net profit after taxes $198,000.00$201,252.00
C. Year 2006 Corporate Taxes$102,000.00$99,445.00
Year 2006 net profit after taxes $198,000.00$200,555.00
D. Years 2007-2010 Corporate Taxes$102,000.00$99,198.00
Years 2007-2010 net profit after taxes $198,000.00$200,082.00
E. Year 2011 Corporate Taxes$102,000.00$100,958.00
Year 2011 net profit after taxes $198,000.00$199,042.00

The company may also be eligible for additional state and local tax deductions, plus interest deductions.

In addition, technologically advanced equipment may provide productivity gains of three times or more compared to older and more conventional equipment. The resultant increase in customer service, improved quality, faster deliveries, improved safety, less downtime, less maintenance costs and less spoilage will increase sales and profits.

Distributors, fabricators and manufacturers should keep in mind that lead times for new equipment deliveries can be up to 4 months or more. So start planning now to take advantage of this opportunity before it expires on December 31, 2004.

Any questions should be directed to your tax professional or the Internal Revenue Service at 800-829-1040.


Written by Michael Batky, Vice President of Business Answers International, a market research, consulting, merger and acquisition, executive recruitment firm. Business Answers International acts as a representative for the SCM Group product line, including CNC panel saws, routers and machining centers to the plastics shapes industry.


For more information, contact Michael Batky, Business Answers International, 4440 PGA Blvd., Suite 505, Palm Beach Gardens, FL 33410, 800-583-4726, Fax: 561-775-0520, Web: www.baintl.com.

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