When Congress passed the economic stimulus package in March, it included an optional capital-depreciation bonus enabling equipment owners to accelerate depreciation in the first year of a new machine's depreciable life. That additional depreciation reduces the tax burden for the year, in turn boosting cash flow.
Now's the time to take advantage of this bonus for 2002. Fleet managers who purchase before the end of the year can take an additional degree of depreciation, if they choose. If a purchase of new equipment is necessary, the depreciation bonus is an excellent financial tool to have.
We caution managers, however, to not let the bonus sidetrack sound business decision-making. After talking with financially savvy fleet managers, some caveats emerge.
First, the stimulus package doesn't reduce the total tax burden on new-machine purchases. Over the depreciable life of the machine, the amounts that can be depreciated have only shifted forward. In the example shown, note that under the existing law, depreciation is actually higher for five of the six years when compared to the depreciation bonus. Also, remember that the bonus option expires in 2004, when the stimulus package ends.
Second, fleet managers must keep a long-term eye on the value of the equipment they purchase. A machine purchased this year in order to capture the depreciation bonus should have a long-term use. If not, that machine won't be managed well over the remaining years of its depreciable life, years that will see higher cost associated with it.
So consider the depreciation bonus as any other sales incentive: Choose the best acquisition strategy for that machine purchase. Determine the need—short-term or long—and make sure the management of the machine matches the financial benefits of the acquisition.
