Business Benefits of the Stimulus Act
As you have probably heard, the recently enacted Economic Stimulus Act of 2008 (Stimulus Act) provided tax rebates for millions of individuals.
The Stimulus Act also provides some generous tax breaks for businesses, particularly small and medium size businesses.
These business provisions are intended to encourage investment and generally provide for faster depreciation (expensing) of qualified business equipment.
Internal Revenue Code Section 179 provides for a large first-year write-off of newly acquired qualifying business equipment: the Section 179 deduction.
However, equipment purchases are limited, and the deduction phases out on a dollar-for-dollar basis at a specific statutorily defined level.
The Stimulus Act significantly enhances the Section 179 deduction for tax years beginning in 2008.
For tax years beginning in 2009 and beyond, the normal Section 179 rules will apply.
For tax years beginning in 2008, the maximum Section 179 deduction is generally increased to $250,000, up from $128,000 before the Stimulus Act.
For 2009 - 2010, the maximum deduction will revert back to $125,000 (the 2007 amount) with inflation adjustments.
In addition, the Section 179 phase-out threshold is generally increased to $800,000, up from $510,000 before the Stimulus Act.
So, the Section 179 deduction is completely phased out at $1,050,000 ($250,000 + $800,000).
The increased phase-out threshold means more small and medium-sized businesses will be eligible for the Section 179 deduction in 2008.
For 2009 - 2010, the phase-out threshold will revert back to $500,000 (the 2007 amount) with inflation adjustments.
Example: New Section 179 deduction rule.
Forrest Corp is a calendar-year taxpayer.
In 2008, Forrest purchases and places in service $910,000 of qualifying Section 179 property.
Forrest's maximum Section 179 deduction for 2008 is $140,000 [$250,000 maximum minus $110,000 ($910,000 - $800,000) excess over the $800,000 phase-out threshold].
Before the favorable changes made by the Stimulus Act, Forrest would not have been entitled to any Section 179 deduction for 2008 because the phase-out threshold was so much lower at $638,000 ($128,000 + $510,000).
Warning: Taxpayers with fiscal tax years should note that the enhanced Section 179 deduction rules don't take effect until the beginning of the fiscal year that starts in 2008.
The maximum Section 179 deduction for tax years beginning in 2007 is generally $125,000, and the phase-out threshold is generally $500,000.
First-year Bonus Depreciation.
The Stimulus Act revives the 50% additional first-year bonus depreciation under essentially the same rules as before for qualifying assets that are both acquired and placed in service during calendar year 2008.
To be eligible for 50% first-year bonus depreciation, an asset must pass all three of the following tests: (1) it must be qualified property, (2) it must be purchased during calendar year 2008, and (3) the original use of the asset generally must commence with the taxpayer during calendar year 2008.
However, the placed-in-service deadline is extended through 12/31/09 for certain longer-lived assets.
Qualified property generally encompasses most tangible personal property, but most real estate assets will generally fail to meet the definition.
Certain leasehold improvements also qualify.
An asset is eligible for 50% first-year bonus depreciation only if its original use commences with the taxpayer after 12/31/07.
In other words, the asset must be new.
A special exception applies to assets that are sold and leased back.
The 50% first-year bonus depreciation break is also available for the cost of "qualified leasehold improvement property.
" To meet this definition, the building must be nonresidential real property, and the improvement must be (a) to the interior portion of a building, (b) made pursuant to or under a lease by either the lessee (or sublessee) or the lessor to property that will be occupied exclusively by the lessee (or sublessee), and c) placed in service more than three years after the date the building was first placed in service.
Certain improvements are ineligible by definition.
These include expenditures to enlarge a building, costs for any elevator or escalator, any structural component benefiting a common area, and any internal structural framework of a building.
For a new passenger auto or light truck that is used for business and subject to the luxury auto depreciation limitations, the 50% bonus depreciation break increases the maximum first-year depreciation deduction by $8,000.
For new passenger autos acquired and placed in service in 2008, the maximum first-year depreciation deduction is $10,960 ($8,000 + $2,960).
For new light trucks acquired and placed in service in 2008, the maximum first-year depreciation deduction is $11,160 ($8,000 + $3,160).
Of course, the full $10,960 or $11,160 amount is available only when the new passenger auto or light truck is used 100% for business.
For instance, if a new passenger auto is used 80% for business, the maximum first-year depreciation deduction would be $8,768 (.
80 x $10,960).
The depreciation rules are the same for both regular tax and AMT purposes with respect to assets for which the 50% first-year bonus depreciation is claimed.
To ensure compliance with requirements imposed by the IRS, we inform you that, unless specifically indicated otherwise, any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any tax-related matter addressed herein.
The Stimulus Act also provides some generous tax breaks for businesses, particularly small and medium size businesses.
These business provisions are intended to encourage investment and generally provide for faster depreciation (expensing) of qualified business equipment.
Internal Revenue Code Section 179 provides for a large first-year write-off of newly acquired qualifying business equipment: the Section 179 deduction.
However, equipment purchases are limited, and the deduction phases out on a dollar-for-dollar basis at a specific statutorily defined level.
The Stimulus Act significantly enhances the Section 179 deduction for tax years beginning in 2008.
For tax years beginning in 2009 and beyond, the normal Section 179 rules will apply.
For tax years beginning in 2008, the maximum Section 179 deduction is generally increased to $250,000, up from $128,000 before the Stimulus Act.
For 2009 - 2010, the maximum deduction will revert back to $125,000 (the 2007 amount) with inflation adjustments.
In addition, the Section 179 phase-out threshold is generally increased to $800,000, up from $510,000 before the Stimulus Act.
So, the Section 179 deduction is completely phased out at $1,050,000 ($250,000 + $800,000).
The increased phase-out threshold means more small and medium-sized businesses will be eligible for the Section 179 deduction in 2008.
For 2009 - 2010, the phase-out threshold will revert back to $500,000 (the 2007 amount) with inflation adjustments.
Example: New Section 179 deduction rule.
Forrest Corp is a calendar-year taxpayer.
In 2008, Forrest purchases and places in service $910,000 of qualifying Section 179 property.
Forrest's maximum Section 179 deduction for 2008 is $140,000 [$250,000 maximum minus $110,000 ($910,000 - $800,000) excess over the $800,000 phase-out threshold].
Before the favorable changes made by the Stimulus Act, Forrest would not have been entitled to any Section 179 deduction for 2008 because the phase-out threshold was so much lower at $638,000 ($128,000 + $510,000).
Warning: Taxpayers with fiscal tax years should note that the enhanced Section 179 deduction rules don't take effect until the beginning of the fiscal year that starts in 2008.
The maximum Section 179 deduction for tax years beginning in 2007 is generally $125,000, and the phase-out threshold is generally $500,000.
First-year Bonus Depreciation.
The Stimulus Act revives the 50% additional first-year bonus depreciation under essentially the same rules as before for qualifying assets that are both acquired and placed in service during calendar year 2008.
To be eligible for 50% first-year bonus depreciation, an asset must pass all three of the following tests: (1) it must be qualified property, (2) it must be purchased during calendar year 2008, and (3) the original use of the asset generally must commence with the taxpayer during calendar year 2008.
However, the placed-in-service deadline is extended through 12/31/09 for certain longer-lived assets.
Qualified property generally encompasses most tangible personal property, but most real estate assets will generally fail to meet the definition.
Certain leasehold improvements also qualify.
An asset is eligible for 50% first-year bonus depreciation only if its original use commences with the taxpayer after 12/31/07.
In other words, the asset must be new.
A special exception applies to assets that are sold and leased back.
The 50% first-year bonus depreciation break is also available for the cost of "qualified leasehold improvement property.
" To meet this definition, the building must be nonresidential real property, and the improvement must be (a) to the interior portion of a building, (b) made pursuant to or under a lease by either the lessee (or sublessee) or the lessor to property that will be occupied exclusively by the lessee (or sublessee), and c) placed in service more than three years after the date the building was first placed in service.
Certain improvements are ineligible by definition.
These include expenditures to enlarge a building, costs for any elevator or escalator, any structural component benefiting a common area, and any internal structural framework of a building.
For a new passenger auto or light truck that is used for business and subject to the luxury auto depreciation limitations, the 50% bonus depreciation break increases the maximum first-year depreciation deduction by $8,000.
For new passenger autos acquired and placed in service in 2008, the maximum first-year depreciation deduction is $10,960 ($8,000 + $2,960).
For new light trucks acquired and placed in service in 2008, the maximum first-year depreciation deduction is $11,160 ($8,000 + $3,160).
Of course, the full $10,960 or $11,160 amount is available only when the new passenger auto or light truck is used 100% for business.
For instance, if a new passenger auto is used 80% for business, the maximum first-year depreciation deduction would be $8,768 (.
80 x $10,960).
The depreciation rules are the same for both regular tax and AMT purposes with respect to assets for which the 50% first-year bonus depreciation is claimed.
To ensure compliance with requirements imposed by the IRS, we inform you that, unless specifically indicated otherwise, any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any tax-related matter addressed herein.
