by Maria Bruggink
Congress recently passed the Economic Stimulus Act of 2008 (the 2008 Act). It is designed to stimulate our economy and includes tax incentives aimed at encouraging businesses to increase their investments in new and used equipment and software by the end of 2008.
Although the business incentives have been overshadowed in the news by the rebates, they are very valuable. Lawmakers are hoping that they generate a powerful incentive for businesses to invest in new equipment, create jobs, and stimulate economic growth.
Here's what your financial institution should know, both for its own taxpaying purposes and for understanding the law’s impact on your commercial customers.
Business tax breaks
Under the 2008 Act, small businesses will be able to deduct up to $250,000 of the cost of new equipment and software placed in service during 2008. Moreover, businesses will be able to claim additional depreciation deductions equal to at least 50% of the cost of new equipment and software placed in service during 2008.
The new law includes an increase in elective expensing (so-called section 179 expense). In lieu of depreciation, businesses may elect to expense (within certain limits) the cost of new or used depreciable business property and/or software purchased during the taxable year.
Before enactment of the 2008 Act, taxpayers were allowed to expense qualified purchases of up to $128,000, provided all such purchases for the year did not exceed $510,000. Otherwise, taxpayers had to reduce the amount expensed under this rule on a dollar-for-dollar basis so that no expensing was permitted if the total purchases of business property totaled $638,000 or more. Expensing under this rule is allowed only to the extent the business generates taxable income.
The 2008 Act increases the amount a business may expense from $128,000 to $250,000 and increases the limitation on purchases from $510,000 to $800,000.
Purchases of depreciable business property and/or software in excess of $800,000 reduce the expensing limitation on a dollar-for-dollar basis. Amounts expensed under this rule continue to be limited to taxable income. However, the increased deduction applies both for regular and alternative minimum tax (AMT) purposes, so there is no AMT adjustment for this item. Nevertheless, the 2008 Act does not increase your ability to deduct more than $25,000 of the cost of an SUV under this rule.
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.
Increase in first-year depreciation for new property
A trade or business generally must recover the cost of property used in that trade or business over a predetermined period of years at 1½ to 2 times the straight-line rate. The cost of real estate is recovered only on a straight-line basis.
The 2008 Act increases the speed at which the cost of new property may be recovered by allowing for an additional deduction (bonus depreciation) equal to 50% of the cost of new property placed in service during 2008. Regular depreciation then can be claimed on the remaining 50% of the cost not deducted under this rule.
The combination of these two rules will generate a first-year deduction on new property placed in service in 2008 ranging from 52% - 66% of the total cost of property, depending on the property's class life.
Property eligible for bonus depreciation includes only new property whose original use begins with the taxpayer. It includes:
- Tangible property that had a recovery period not exceeding 20 years, which includes most business use personal property.
- Purchased computer software.
- Water utility property.
- Qualified leasehold improvement property.
Bonus depreciation is not allowed for any new or used real estate.
Luxury limits raised
The strict limits on cost recovery deductions for company cars (so-called luxury automobiles) are increased by $8,000 for new cars placed in service during 2008 and used predominantly (more than 50%) in the trade or business. An SUV built on a truck chassis and exceeding 6,000 pounds is exempt from the luxury automobile rules and therefore is entitled to the additional 50% deduction not limited to $8,000.
Bonus depreciation is allowed for both regular and alternative minimum tax purposes and is not limited to taxable income (as is elective expensing discussed above).
This new provision generally will benefit most taxpayers. However, taxpayers with NOL carryovers or those who anticipate being in a higher bracket in future years may want to elect not to claim the bonus depreciation.
Incentives and impacts
On its face, the new law appears to produce significant benefits for most business taxpayers. Nevertheless, there are a number of situations that will require extra planning to derive the full benefits. Take time to understand the true impact to your business.