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Business incentives in the Economic Stimulus Act of 2008 Article (MS Word)
Business incentives in the Economic Stimulus Act of 2008 Article (.pdf)
Business incentives in the Economic Stimulus Act of 2008
Dear Reader,
As you probably know, Congress recently passed an economic stimulus
package (the Economic Stimulus Act of 2008) which is intended to
jump-start our economy, in part through tax incentives aimed at
encouraging businesses to increase their investments in new
equipment by the end of 2008. Under the Act, small businesses will
be able to write off up to $250,000 of qualifying expenses in 2008.
In addition, businesses will be able to deduct an additional 50% of
the cost of certain investments in 2008. Here are the details.
Boosted section 179 expensing.
Under pre-Act law, taxpayers can expense (i.e., deduct currently, as
opposed to taking depreciation deductions over a period of years) up
to $128,000 for 2008. This annual expensing limit is reduced (but
not below zero) by the amount by which the cost of qualifying
property placed in service during 2008 exceeds $510,000. The
expensing rules are eased for qualifying empowerment zone property,
renewal property, and GO Zone property. The amount of the expensing
deduction is limited to the amount of taxable income from any of the
taxpayer's active trades or businesses.
Under the Act, for tax years beginning in 2008, the $128,000
expensing limit is increased to $250,000, and the overall investment
limit is increased from $510,000 to $800,000.
As a result of this incentive, most small businesses, and even some
moderate-sized businesses with moderate capital equipment needs,
will be able to obtain a full deduction for the cost of business
machinery and equipment purchased in 2008, thereby reducing their
effective cost for those assets. What's more, there is no
alternative minimum tax (AMT) adjustment with respect to property
expensed under Code Sec. 179.
Bonus depreciation makes a comeback.
Bonus first year depreciation was first allowed following the
terrorist attacks of 2001 but generally isn't available for property
acquired after 2004. (There are some exceptions, such as for
qualified GO Zone property generally placed in service before 2008.)
The Act provides for bonus (accelerated) depreciation by allowing a
bonus first-year depreciation deduction of 50% of the adjusted basis
of qualified property placed in service after Dec. 31, 2007, and,
generally, before Jan. 1, 2009. The basis of the property and the
depreciation allowances in the year the property is placed in
service and later years are appropriately adjusted to reflect the
additional first-year depreciation deduction. The amount of the
additional first-year depreciation deduction is not affected by a
short taxable year. The taxpayer may elect out of additional
first-year depreciation for any class of property for any taxable
year.
The interaction of the additional first-year depreciation allowance
with the otherwise applicable depreciation allowance may be
illustrated as follows. Assume that in 2008 a taxpayer purchases new
depreciable property and places it in service. The property's cost
is $1,000 and it is 5-year property subject to the half-year
convention. The amount of additional first-year depreciation allowed
under the provision is $500. The remaining $500 of the cost of the
property is deductible under the rules applicable to 5-year
property. Thus, 20 percent, or $100, is also allowed as a
depreciation deduction in 2008. Accordingly, the total depreciation
deduction with respect to the property for 2008 is $600. The
remaining $400 cost of the property is recovered under otherwise
applicable rules for computing depreciation.
Bonus depreciation is allowed for AMT purposes as well as for
regular tax purposes. Additionally, bonus depreciation is permitted
only for: (1) property to which MACRS applies that has an applicable
recovery period of 20 years or less, (2) water utility property, (3)
non-custom-made computer software, and (4) qualified leasehold
improvement property. Original use of the property must begin with
the taxpayer after Dec. 31, 2007. Additionally, the
placed-in-service cutoff date is extended for an additional year
(i.e., before Jan. 1, 2010) for certain property with a recovery
period of ten years or longer and certain transportation and
aircraft property.
The otherwise applicable “luxury auto” cap on first-year
depreciation is increased by $8,000 for vehicles that qualify.
I hope this information is helpful. If you would like more details about these aspects or any other aspect of the new law, please do not hesitate to call.