The hidden tax break for techies is almost gone

Time is running out to take advantage of a little-known tax break for tech investments. Come Dec. 31, it’s gone.

With Congress and the Treasury Department throwing billions of dollars at banks and maybe auto companies, it was easy to miss a key part of the economic stimulus package that passed earlier this year. It has the catchy name of 168k — named after the Internal Revenue Code section that applies: 168(k)(2)(g) — and I’ll bet you’ve never heard of it. But if you’re a developer or IT shop in need of new hardware or software, pay attention so you can save some serious money.

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What’s more, the savings will let you do the kind of upgrades and purchases you might well have postponed because of the terrible business climate. By cutting the cost way down, you can be that much more competitive.

Section 168k of the tax code was originally enacted in 2001 but had expired at the end of 2004 (except for a few special cases). It’s now back on the books, but it covers only assets purchased in calendar year 2008. This means you have six more weeks to buy stuff you didn’t think you could afford. (There’s no way to know if the new Congress will extend it again.)

Here’s a link to a copy of the stimulus package; search for “168k” so you can see for yourself without reading through a 120-page law.

In essence, the provision lets you depreciate 50 percent of software and hardware costs in this tax year, says Robert Kish, a vice president of Vitale, Caturano & Co., a technology consultancy. His company, by the way, has its root in the world of accounting, so he’s probably a better source on tax matters than most technology consultants.

Normally, you can depreciate only a much smaller percentage each year — typically 20 percent for computer equipment and software. You then depreciate the remainder of the cost over the appropriate IRS schedule (typically five years for computer equipment and software).

But wait, as they say on late-night TV, there’s more. The changes contained in the stimulus package boosted the amount of money you can deduct for capital expenses the year you buy things, known as the Section 179 deduction. Thanks to the 168k provision, the maximum deduction under Section 179 rose for 2008 from $128,000 to $250,000. The net effect is that you can reduce your taxable income by a greater amount this year.

Here’s an example of what that means: On Dec. 29, 2008, you buy workstations and software valued at about $400,000. The 168k code provision lets you deduct $250,000 as a Section 179 deduction plus $75,000 in depreciation (50 percent of the remaining amount) for a total of $325,000 off the top from this year’s income, and then split the remaining $75,000 over the next four years. (Under the soon-to-return old rules, you could deduct just $182,400 the first year and have to spread the rest over the following four years.)

Of course, there are some complexities involved that will adjust the specific numbers in each case, but you get the idea. Your tax adviser can give you the specifics in your situation — remember, I’m not an accountant or tax adviser.

Depending on your needs, you can save even more money by leasing, instead of buying. But there’s a nuisance here: it has to be a capital lease, notes Kish. That’s because standard leases, like software maintenance fees, are considered operating expenses and thus don’t get the benefit of the act.

However, there is a downside to a capital lease: You’re essentially locked into the agreement for five years, which is the normal depreciation period. If, for example, you like to refresh hardware every three years, a capital lease is not a good idea, says Kish.

But all things being equal, the 168k provision could let you loosen those purse strings a bit. These days, that’s good for all of us.

I welcome your comments, tips, and suggestions. Reach me at bill.snyder@sbcglobal.net.