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Wilmington NC CPA discusses 100 Percent Bonus Depreciation

100% bonus depreciation as a small business tax incentive discussed by a New Hanover County CPA firm

Gary Bode, CPA: we believe in proactive tax positioning. For a free initial consult, please call us at 399-2705.

100% Bonus Depreciation can be a great small business tax incentive.  But it can be a two edged sword.  We’ll look at the dark side in this post: a small business tax break, leading to a cash flow crunch the following year(s).  President Obama’s tax relief for 100% bonus depreciation isn’t really new.  100% depreciation, within the relevant range of most small companies, has been around for years.  So this is an old cautionary tale about cash flow, skewed in this scenario to show a potential trap.

The 100% Bonus Depreciation Scenario

Our example will use “Wilmington NC CPA Firm” as our example company. Coming out of the recession, it needs $110,000 of infrastructure improvement, namely a networked computer system.  In early 2011, Wilmington NC CPA Firm pays $10,000 down and finances $100,000 for the computer system.  Loan terms require about a $3,100 monthly payment for three years, starting in July 2011. 

100% bonus depreciation means the entire $110,000 computer system can be expensed in 2011, leading to a big tax break in 2012.  Ordinarily, equipment is expensed off over its expected useful life, so the tax deduction is spaced out over multiple years.  Our example skews both ends of the scenario:  100% bonus depreciation and maximum up front financing of the computer system.

2011 is Good – Calendar Year

In 2011 the computer system allows Wilmington NC CPA Firm to bring in an additional $30,000 of revenue.  This easily covers the $18,600 of loan payments and $10,000 of down payment.  

2012 is Wonderful – Calendar Year

The economy grows and Wilmington NC CPA Firm brings in $40,000 of revenue over 2009, with only the material additional expense of the loan payments, about $37,600.  On the 2010 income tax return, it uses the small business tax incentive of 100% bonus depreciation, writing off the entire $110,000 of the computer system. Plus it deducts the 2010 interest paid.  Assuming a 35% aggregate tax rate, it generates $38,500 of actual, cash flow, tax savings.

Proactive planning is prudent.  We look at future tax positioning while performing the current tax preparation.  If you’d like a free initial consult with a CPA tax accountant, please consider calling us at 399-2705.

2013 is Not so Good

Wilmington NC CPA Firm still brings in $40,000 of additional revenue over 2009!  But on the 2012 tax return there is no small business tax incentive left.  It can only deduct the interest paid.  All the bonus depreciation is gone.  Now it pays both the loan payments and tax on the additional $40,000.  This means a $10,600 cash deficit in 2013.  A big deal?  Maybe not if this known contingency was properly funded.  But we’ve seen cases over the years where the small business tax incentive of 100% bonus depreciation led to a cash flow crunch in future years. 

We’re a CPA firm that provides a friendly mix of expertise and customer service.  For a free initial consult, please call (910) 399-2705.

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