Business Tax Breaks Under The Economic Stimulus Act of 2008 by David J. Ledermann |
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On February 13, 2008, the Economic Stimulus Act of 2008 was signed into law. In addition to the much publicized advance rebates under the Act for eligible individual taxpayers, the Act includes a number of favorable tax provisions for businesses. The Act encourages investment in capital goods and equipment in 2008 by boosting expensing and reinstituting 50% bonus first-year depreciation.
Under pre-Act law, taxpayers could 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 was to be reduced by the amount that the cost of qualifying property placed in service during 2008 exceeded $510,000. (More favorable rules apply in certain circumstances, such as for qualifying empowerment 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.
The Act provides that for tax years beginning in 2008, the $128,000 expensing limit is increased to $250,000, and the investment threshold at which this limit begins to decrease is raised 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. Further, no alternative minimum tax adjustment with respect to property expensed under this provision is required.
As for otherwise depreciable property, if acquired after 2004, it would not have been eligible under pre-Act law for bonus first-year depreciation. However, the Act restores accelerated depreciation by allowing a bonus first-year deduction of 50% of the adjusted basis of qualified property placed in service in 2008 (or 2009 for certain property with a recovery period of ten years or longer and certain transportation and aircraft property). 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 interaction of the first-year bonus depreciation 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 five-year property. 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 five-year property. Thus, 20%, 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 alternative minimum tax purposes as well as for regular tax purposes. Certain limitations apply on the types of property eligible for bonus depreciation. Original use of the property must begin with the taxpayer after December 31, 2007.
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