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Why Would a Business Forego
Bonus Depreciation? The economic stimulus law enacted in February created a huge tax incentive for businesses to buy new equipment. Besides increasing the maximum Section 179 deduction to $250,000, the new law authorizes a "bonus depreciation" deduction for qualified assets.
Therefore, it may come as a surprise to some businesses that there is a special election to forego bonus depreciation. But this can make sense for some businesses and allow them to collect a refund for credits previously claimed on their tax returns.
Background: In addition to Section 179 and regular depreciation deductions under the Modified Accelerated Cost Recovery System (MACRS), your business may qualify for 50 percent bonus depreciation.
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A Handful of Tax Breaks in the New Law On October 3, 2008, President Bush signed the massive bailout law, which contains a variety of tax and financial provisions that will affect individuals and American businesses.
Here are some highlights from the Emergency Economic Stabilization Act of 2008:
- The legislation includes a provision that would temporarily raise the cap on federally insured deposits from $100,000 to $250,000. The provision expires at the end of 2009.
- The law extends the research tax credit, which provides an important incentive for businesses to invest in the development of new products and technologies. It had expired at the end of 2007. The law extends the credit to amounts paid or incurred through December 31, 2009.
- There are tax incentives for restaurant and leasehold improvements.
- The legislation grants tax relief for victims of floods, storms, and tornadoes that occurred between May 20 and August 1 in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, and Wisconsin. There are also tax incentives for other disaster victims.
For our complete analysis of the personal tax breaks included in the law, click here. |
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Many people are familiar with the federal insurance provided to bank depositors by the FDIC. But they may be unaware that credit unions have similar protection. The National Credit Union Administration (NCUA) is a federal agency that administers an insurance fund backed by the full faith and credit of the U.S. Government. Insured credit unions must prominently display the official NCUA insurance sign. |
You may remember 50 percent bonus depreciation from 2002. Under the Economic Stimulus Act, it's back -- but only for new qualifying assets acquired and placed in service during 2008 (the deadline is extended through 2009 for certain long-lived assets). Used assets don't qualify.
Under first-year bonus depreciation, your business can immediately deduct half of the cost of a qualifying asset if it's purchased and placed in service before the deadline.
Important: While large businesses may be ineligible for the Section 179 deduction, bonus depreciation is available to any business regardless of size. In addition, bonus depreciation deductions can be used to generate an overall taxable loss for the year, which a company may be able to carry back to earlier years to generate refunds.
However, unlike the 2002 bonus depreciation deduction, the economic stimulus law did not temporarily increase the net operating loss (NOL) carryback period from two years to five years. Thus, if your business has reported losses for several years, you could be handcuffed by the law.
New election: Your business may have another option under the new federal housing law, which was signed into law on July 30 of this year. A little-publicized provision in the law enables a business to elect to take advantage of two refundable credits that are otherwise limited by the tax law: the alternative minimum tax (AMT) credit and the tax credit for qualified research activities, which is claimed as part of the general business credit.
- For corporations subject to the AMT, the amount of the AMT paid is allowed as a credit in a subsequent tax year to the extent regular tax liability exceeds AMT liability.
- The research tax credit is generally limited to the excess of the greater of regular tax or AMT liability.
A corporation otherwise eligible for bonus depreciation can claim additional AMT or research credits for qualified property placed in service after March 31, 2008. Caveat: The corporation can't claim accelerated depreciation under MACRS for property subject to the special election. It is required to use the straight-line method, which results in smaller deductions in the early years of ownership. But note that property acquired before April 1, 2008 still qualifies for bonus depreciation.
Finally, the credit is limited to 20 percent of the bonus depreciation that could have been deducted (up to the lesser of 6 percent of the pre- 2006 credits or $30 million).
Caution: This article only outlines the basic premise behind the election. It is a highly complex area requiring professional assistance. |
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