The 2003 Tax Act: Congress Wants You to Spend and Will Reward You to Do So

One theme running through President Bush's tax philosophy is that reducing taxes on business is good for America.  This philosophy is clearly expressed in the $350 billion tax cut package enacted on May 28, 2003 – the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "2003 Tax Act").  The 2003 Tax Act assists businesses and business owners in many ways, including across-the-board rate reductions for individuals, a new 15% tax rate for dividends and a historically low 15% capital gains tax rate.

In addition to rate cuts, two provisions were included in the 2003 Tax Act to encourage businesses (particularly small businesses and professional practices) to buy more machinery and equipment, thereby stimulating the economy.  These provisions are (i) an increase in the Internal Revenue Code Section 179 expensing election to $100,000 per year (up from $25,000) and (ii) the allowance of 50% bonus first-year depreciation for new machinery, equipment and other assets (where the costs exceed amounts that can be expensed, are ineligible for expensing or where the taxpayer elects out of expensing). 

Section 179 Expensing -- Now $100,000 Per Year

Section 179 of the Internal Revenue Code provides an election for small businesses to expense (deduct currently) the costs of certain machinery and equipment that otherwise would have to be depreciated (deducted over a number of years).  Under prior law, a taxpayer could expense up to $25,000 of eligible business equipment.  The expensing election phased out dollar for dollar to the extent the taxpayer placed over $200,000 of otherwise eligible property into service during the year (that is, if the business bought over $225,000 of new machinery or equipment, the Section 179 expensing election was not available). 

The 2003 Tax Act enhances the Section 179 write-off in several significant ways for business property purchased in 2003, 2004 and 2005.  The new law increases to $100,000 per year the dollar amount of new business property that may be expensed.  This fourfold increase truly should encourage business spending.  Also increased is the phase out threshold.  The Section 179 expensing election is cut back dollar for dollar by the amount of otherwise eligible property over $400,000 bought and placed in service in any year.  The Section 179 write-off is not available if the business purchases over $500,000 of otherwise eligible property (up from $225,000 under prior law).

In general, Section 179 expensing is available for tangible depreciable personal property purchased and placed in service during the year -- that is, machinery and equipment with a useful life of more than one year, such as copiers, computers and office furniture (but generally not automobiles).  In addition, the 2003 Tax Act makes off-the-shelf computer software eligible for Section 179 expensing.