If your IT department is nursing along old equipment because budgets have been frozen, there’s some tax news that may help you justify new purchases.

The American Recovery and Reinvestment Act has a number of provisions designed to encourage small-business owners to invest in their companies. The legislation increases expense and bonus depreciation limits, which means that now may be the most opportune time to spend on those much-needed upgrades.

If your expertise is in technology, not tax accounting, the details may not make a lot of sense. But it will to your CFO or company accountants. Bottom line: Your company gets a tax break if it buys new equipment in the next couple of months.

Small businesses that invest in new property or equipment will have the opportunity to increase the expensing or depreciation of the purchases in 2009. Companies have three options:

1. Increased limit on Section 179 expense

Businesses can elect to expense, rather than depreciate, the cost of machinery, equipment, vehicles and other tangible property placed in service in 2009. The maximum deduction is $250,000, and the cost of property in excess of this amount may be depreciated over the life of the property.

In 2010, the Section 179 cap will drop to $133,000 (indexed for inflation). After 2010, the cap returns to the prior limit of $25,000. The Section 179 deduction cannot exceed taxable income. If the deduction is limited, it may be carried over to future years. However, it phases out for capital expenditures above $800,000 and limits the tax break to smaller businesses. The phaseout level on capital expenditures also decreases after 2009.

2. Bonus depreciation allowed in 2009

A small business may deduct up to 50% of the cost of “qualified property” purchased and placed in service in 2009 (2010 for certain longer-lived property).

Qualified property is almost any capital expenditure other than buildings. The Section 179 expense and the bonus depreciation may be used together. However, the basis for depreciating the property must first be reduced by the Section 179 expense.

3. Extended NOL carry-back period

Normally, a net operating loss (NOL) may be carried back two years and carried forward 20 years to offset taxable income. For NOLs created after Dec. 31, 2007, the act provides a five-year carry-back period. Therefore, if the business paid taxes in the prior five years, the NOL may be carried back to the fifth prior year and each succeeding year to offset income and refund taxes.

This provision applies to most types of businesses, as well as individuals, provided that gross income did not average more than $15 million in the three years leading up to the NOL. To claim the refund, eligible businesses must file Form 1139 by Sept. 15. Eligible individuals must file by Oct. 15 using Form 1045.

Tags: American Recovery and Reinvestment Act, spending, tax break, taxes