Review of the 2008 Tax Stimulus Package (Part Two of Two) – What do businesses have to do to benefit?
By Anthony J. Perrotta, CPA
Congress recently passed the Economic Stimulus Act of 2008 (the "Act") which created specific tax incentives to encourage businesses to increase their investments in new equipment by the end of 2008. For the most part, these types of incentives are not new (we've seen them before), just newly packaged and potentially with a wider reach and effect. This article deals with what businesses must do to take advantage of the new law and its benefits.
Enhanced section 179 expensing. Under pre-Act law taxpayers (other than an estate, trust, and certain noncorporate lessors) could elect to expense (i.e., deduct currently, as opposed to taking depreciation deductions over a period of years) up to $128,000 of qualifying new asset additions placed in service (e.g., machinery, equipment, furniture, computers, and certain off-the-shelf software to name a few) during 2008. This annual expensing limit ($128,000) was reduced (but not below zero) by the amount by which the cost of qualifying property placed in-service during 2008 exceeded $510,000. The amount of the expensing deduction is further limited to the amount of taxable income realized from any of the taxpayer's active trades or businesses.
Under the Act, for tax years beginning in 2008 (and only 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 after-tax deduction cost for those assets. In addition, there is no alternative minimum tax (AMT) adjustment with respect to property expensed under Code Section 179.
The new law does not alter the section 179 limitation imposed on sport utility vehicles, which have an expense limit of $25,000.
Bonus depreciation returns. Bonus first year depreciation was first allowed following the terrorist attacks of 2001 but generally isn't available for property acquired after 2004 (there were some exceptions to this rule).
The Act provides for bonus (accelerated) depreciation by allowing a first-year depreciation deduction of 50% of the adjusted basis of qualified property placed in service after December 31, 2007, and, generally, before January 1, 2009. The basis of the property and the depreciation allowances in the year the property is placed in service and later years are 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 following illustration shows the interaction of the additional first-year depreciation allowance with the otherwise applicable depreciation allowance. Assume that in 2008 a taxpayer purchases new depreciable property and places it in service. The property's cost is $1,000 and has a 5-year life. The amount of additional first-year bonus depreciation allowed under the new 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 under regular depreciation rules. Thus, the total depreciation deduction with respect to the property for 2008 is $600. The remaining $400 cost of the property is recovered under the applicable rules for computing depreciation. The benefit to the taxpayer is an additional $400 depreciation deduction in the first year.
Bonus depreciation is permitted only for: (1) property to which the Modified Accelerated Cost Recovery System (MACRS) applies that has an applicable recovery period of 20 years or less, (2) water utility property, (3) non-custom-made (i.e., off-the-shelf) computer software, and (4) qualified leasehold improvement property. The original use of the property must begin by the taxpayer after Dec. 31, 2007 and before January 1, 2009. This placed-in-service cutoff date is extended for an additional year (i.e., before January 1, 2010) for certain property with a recovery period of ten years or longer and certain transportation and aircraft property.
Bonus depreciation is also allowed for AMT purposes.
Special rules. The applicable "luxury auto" cap on first-year depreciation increases by $8,000 for vehicles that qualify. Thus, the maximum first year depreciation allowed for luxury autos placed in service during 2008 would be $11,060 ($3,060 normal first year depreciation allowed plus $8,000).
The Code section 179 expense allowance is claimed prior to the bonus depreciation claimed for any asset. The bonus depreciation is applied to the "unadjusted depreciable basis."
Planning to be done in 2008 to take advantage of these new provisions. From a planning perspective, this means that businesses will have to assess their capital needs for 2008 and 2009 keeping in mind that these are short-term incentives designed to boost the weakening economy. If a business usually staggers its capital purchases from year to year, it may make eminent sense to purchase the equipment budgeted for 2009, for example, during 2008 (or during the tax year that begins during 2008) since the after-tax deduction cost of the property could be substantially lower (even if short-term financing was needed) than waiting until 2009 to purchase. Businesses will have to analyze whether the income tax benefits outweigh real costs such as underutilized machines and assets (if they are on-site, yet remaining idle), short-term financing if cash is not available to purchase the additional property early, and the carryforward of unused section 179 deductions if business income (or lack of it) limits the amount currently deductible.
If you would like to discuss this subject further, please contact Anthony J. Perrotta (aperrotta@pmn.com) or any member of our tax service team at (617) 426-9440.
Note: This article represents a general overview of or opinion on certain tax issues or developments and should not be relied upon without an independent, professional analysis of how any of these provisions may apply to a specific situation. We recommend you consult your professional tax advisor before taking any action based on anything in this article.
IRS CIRCULAR 230 NOTICE: In compliance with U.S. Treasury Circular 230 Regulations and any applicable state laws, we hereby notify you that any tax advisor contained in the body of this document, or attachments thereto, was not intended or written to be use, and cannot be used, by the recipient or any other party for the purpose of (1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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