Earlier this year, Congress passed the Economic Stimulus Act of 2008 to jump-start our economy. The centerpiece of the legislation was government’s issuance of rebate or stimulus checks to most Americans. Additionally, two important business tax incentives were also part of the act which was aimed at encouraging businesses to increase their investments in new equipment by the end of 2008.
As 2008 comes to a close, it is important to examine the two incentives and incorporate them, if appropriate, as part of the yearly tax planning exercise with your CPA. Under the new act, small businesses will be able to write off up to $250,000 of qualifying expenses in 2008. In addition, businesses will also be able to deduct an additional 50% of the cost of certain investments in 2008.
Increased Section 179 Expensing
Under pre-Act law, taxpayers could expense 100% of qualified assets purchased for business up to a limit of $128,000 for 2008. This annual expensing was reduced dollar-for-dollar by the cost of the property placed in service in 2008 that exceeded $510,000.
Under the Act, for tax year starting January 1, 2008, the expensing limit increases from $128,000 to $250,000 and the investment limit increases from $510,000 to $800,000. It is important to note that the amount of the expense is still limited to the amount of taxable income related to the taxpayer’s active trade or business.
This deduction will allow most small businesses to obtain a full deduction for the cost of tangible personal property (machinery, equipment, computers, furniture, fixtures etc) in 2008, thereby reducing the effective cost of those assets. For those who worry about the alternative minimum tax (AMT), there is no AMT adjustment with respect to property expenses under Section 179.
Comeback of Bonus Depreciation
Bonus depreciation was the hallmark of tax legislation that came out of Congress after September 11 2001. Most of the bonus depreciation provisions however, expired in 2004. The new act revives the same provisions for 2008. The impact of this deduction is enormous. CCH, a leading tax research service, estimates this provision will give businesses an additional $44 billion in deductions for 2008.
The Act provides for bonus or accelerated deprecation deduction of 50% of the adjusted basis of qualified property placed into service after December 31, 2007 and before January 1, 2009. Bonus deprecation is allowed for AMT purposes as well.
To be eligible to claim bonus depreciation, the property must be 1) Eligible for modified accelerated cost recovery system (MACRS) with depreciable life of 20 years or less; 2) water utility property; 3) computer software (off-the-shelf) and 4) qualified leasehold property.
The bonus depreciation has another favorable impact on limits imposed on auto depreciation. For those intending to purchase automobiles or trucks for their businesses in 2008, the first year limit on depreciation is increased from $2,960 to $10,960.
It is of vital importance to consult your CPA to understand the finer nuances of this Act and implement the provisions in your tax planning for 2008. We certainly hope that your tax advisor has initiated a discussion on this topic. If not, we recommend having this discussion with your advisor as soon as possible before time runs out.
Amol Nirgudkar, CPA is the managing partner of Reliance Consulting LLC can be reached at (813) 931-7258 or via email at firstname.lastname@example.org