The season is upon us when many companies decide whether to go on year-end shopping sprees for computers and other capital equipment. If your company is in that position and is based in the United States, there is something you should know that could lead you to buy now rather than after the New Year. By placing new IT equipment in service before the end of this year, your company could qualify for attractive tax incentives that could save it thousands of dollars. Those savings could help you to justify the immediate acquisition of a new eServer i5 or other equipment that your IT department needs.
The tax incentives to which I am referring are part of the Jobs & Growth Tax Relief Reconciliation Act of 2003, a bill that packed dozens of temporary incentives into the Internal Revenue Service (IRS) code. Among those incentives, two are especially valuable for small and medium-size businesses. The first incentive, which is in Section 179 of the IRS code, allows companies to immediately write off $102,000 of capital equipment that they purchase by the end of this year. This represents significant tax savings, as companies usually must depreciate IT equipment over periods as long as five years. Under Section 179, however, your company could immediately expense up to $102,000 of equipment that it places in service this year.
Of course, your company may have already purchased more than $102,000 of equipment this year. If that is the case, Section 179 will not help you to save money on additional purchases. However, you can still reduce your 2004 taxes through a second incentive that lets companies immediately write off 50% of the cost of an item in addition to the standard first-year depreciation deduction. Say, for instance, that your company has already purchased $150,000 of IT equipment this year and you want to acquire a $50,000 server. Your company could immediately expense $102,000 of its previous purchases under Section 179, write off 50% of the remaining $48,000, then write off 50% of the $50,000 server. You could also take the standard first-year depreciation write-off of 20% on the new server as well.
Let's apply these tax incentives to a hypothetical iSeries purchase to see how much money your company could save. Suppose that your company is in the 34% tax bracket and spends $50,000 on an eServer i5 before the end of this year. Here are three potential scenarios in which your firm could save big on taxes.
- If the purchase does not put your company over the $102,000 limit described above, it could immediately expense the entire purchase rather than depreciating it over five years. This would reduce your company's tax bill by 34% of $50,000, or $17,000.
- If your company has already purchased over $102,000 of capital equipment, it could still qualify for the 50% bonus depreciation. This means that it could write off an additional $25,000, thus saving an extra $8,500 in taxes.
- If your company has not purchased over $102,000 of capital equipment but the server purchase would put it over that limit, you could expense part of the server and use the 50% bonus depreciation on the remaining part. For instance, if your company has already made $80,000 in purchases, you could immediately write off the first $22,000 of the server and take a 50% bonus depreciation on the remaining $28,000. This would create a net tax savings of $12,240.
As you can see from these illustrations, the IRS tax laws could save you tens of thousands of dollars on IT equipment that you put in service this year versus next year. Be aware, however, that additional rules apply to these incentives that are too complicated to discuss here. Your company should consult with its tax advisors about potential savings, as this article is no substitute for their expertise.
Another Possible Reason to Buy Now
There is another reason that your company may want to acquire iSeries servers sooner rather than later. If IBM remains true to form, it will soon withdraw new placements and upgrades for most of the iSeries 8xx generation of servers.
While IBM has made no official statements about product withdrawals, chances are good that it will do so during the first half of 2005. Over the last decade, IBM has consistently done two things after announcing a new generation of iSeries servers. First, it has withdrawn new placements of the previous iSeries generation (otherwise known within Big Blue as "N-1") less than a year after announcing the new generation. Second, it has withdrawn all upgrades of the iSeries generation before N-1 (otherwise known as "N-2") at or around the same time as it retires new placements of the N-1 generation. IBM tends to make most withdrawal announcements during first quarters, with the withdrawals taking effect during the second half of the same year.
Since IBM announced a new iSeries generation this year, it is highly likely that it will take the following actions next year. Sometime during the first quarter, the company could announce that it will stop selling new iSeries Models 800, 810, 825, 870, and 890 during the second half of 2005. Around the same time, IBM could also announce that it will withdraw all upgrades of the iSeries 820, 830, and 840 (including those to the eServer i5) during the second half of next year. This means that if your company is considering one of these new placements or upgrades, it should decide now rather than later and fund its IT budget accordingly.
In short, between IBM's probable announcements and the tax incentives that are about to expire, iSeries customers have good reasons to buy now rather than later. If you have new hardware on your holiday wish list, show your management team this article. Who knows? Some of that gear may show up under your IT department's Christmas tree.