An analysis of the new asset-expensing option

Of particular interest to small-business people is a recent tax code change that grants the option to expense up to $5,000 of asset purchases. Firms previously had to capitalize and depreciate long-term assets, but they now can simply write off these assets, to a maximum of $5,000. The change permits firms the advantage of decreasing their proximate income tax burden, but the expensing of asset purchases entails the disadvantage that income tax payments over depreciable lives of the assets will be larger than if the firms had capitalized the assets. The investment tax credit is not allowed under the expensing option. This review analyzes this new ''tax break.'' Conclusions reached are: 1. To some firms, the net, immediate tax saving may be critical to survival, and expensing may be the best choice. 2. For most firms, profitability is not the prime consideration, and capitalizing the asset purchase seems to be the preferred treatment.