Sidney Kess, CPA, JD, who writes and lectures on tax topics, New York City. He was a partner at KPMG Peat Marwick and national director of taxes at Main Hurdman. He was selected by CPA Magazine as the most influential practitioner in America.
The Economic Stimulus Act of 2008, a $168 billion tax package designed to jump-start the economy, was signed into law by President Bush on February 13. While the main feature of the package is tax rebate checks for individuals ($150 billion of the total package), it contains some important tax breaks for businesses. How the stimulus package applies to your business…
Under the new law, small businesses are eligible for greater first-year expensing of equipment purchases (also called the Section 179 deduction). The goal of this incentive is to stimulate the economy by inducing companies to buy more equipment.
The dollar limit on expensing of equipment placed in service in 2008 is $250,000, rather than the $128,000 limit that had been scheduled for 2008. The new limit is double the expensing limit ($125,000) that applied in 2007.
The deduction phases out for total purchases exceeding $800,000 — the $250,000 expensing limit is reduced by one dollar for each dollar spent on equipment over this limit. Thus, a business with equipment purchases in 2008 of $900,000 would be limited to an expensing deduction of $150,000 ($250,000 minus the $100,000 spent over the $800,000 threshold). No deduction can be claimed once total purchases top $1,050,000 in 2008.
What can be expensed: “Equipment” for this purpose means tangible personal property, such as computers, office furniture, machinery, and large trucks. It also includes “off-the-shelf” (rather than custom designed) software.
Example: If a trucking company purchases and places in service in 2008 a trailer truck costing $160,000, the entire purchase price can be expensed.
Equipment can be new or used. However, expensing applies only to the first year that the equipment is placed in service by the taxpayer. This means that personal equipment converted to business use does not qualify for expensing. For instance, if you have a computer that you own personally but that you start to use for business in a home office, it cannot be expensed.
Saver: The lower of either what you paid or fair market value at the time of conversion to business use can still be depreciated over a five-year recovery period.
Expensing is not automatic — it must be elected on Form 4562. Caution: Expensing produces a tax savings only if the business is profitable for the year. If the business is not profitable, it’s better not to elect expensing and, instead, to depreciate the equipment so that depreciation deductions will be available in future profitable years.
Note: Expensing can be used even if the equipment’s purchase price is financed in whole or in part.
Under the new law, businesses are entitled to claim 50% bonus depreciation for eligible property (see below) placed in service in 2008. This means that half the cost of the property can be deducted in the first year, along with any additional depreciation on the other half of the property’s cost, as well as any first-year expensing (if applicable).
Example: If a company spends $450,000 on improvements that it makes to leased property in 2008, it can deduct $225,000 and depreciate the balance of $225,000. Assuming that the balance has a 15-year depreciation recovery period (the 15-year recovery period expired at the end of 2007 but is expected to be extended), then the depreciation deduction for 2008 is $15,000 ($225,000 divided by 15 years). The total deduction for 2008 is $240,000 ($225,000 bonus depreciation plus $15,000 regular depreciation).
Bonus depreciation applies to most tangible personal property (technically, property with a depreciation recovery period of less than 20 years), off-the-shelf software, and qualified leasehold improvements.
Qualified leasehold improvements are improvements to the interior portion of commercial property made more than three years after the building was placed in service.
Caution: Only new property is eligible for bonus depreciation — used property does not qualify for this tax break.
Bonus depreciation merely affects the timing of depreciation deductions — it does not provide greater total write-offs for property acquisitions. You are not required to use bonus depreciation — you can opt to use only regular depreciation to save deductions for future years when you may be in higher tax brackets.
Cars and light trucks weighing no more than 6,000 pounds and used for business can be depreciated only up to a fixed dollar limit annually. The IRS sets these limits each year.
New: The dollar limit on depreciating business cars and light trucks placed in service in 2008 is increased by $8,000. Thus, if the standard first-year depreciation limit for a new passenger car turns out to be $3,060 (the 2007 amount — the exact number has not yet been announced for 2008), the total depreciation limit for the vehicle for 2008 would be $11,060.
To use the $8,000 added dollar limit, business use of the vehicle must exceed 50% of its total use. Also, the dollar limit applies only to new vehicles — the purchase of a used vehicle does not qualify.
The biggest benefit that your business may see from the new law is higher sales. If taxpayers use their rebate checks to buy your goods or services, then you will see greater profits in 2008.
Rebate checks will not be sent until May or June, so it may be several months before money trickles into business coffers.
What you can do: Target your marketing efforts to capture “rebate dollars.” For example, offer special rebate sales promotions.
Downside: Because of the income limits placed on eligibility to receive rebate checks, many business owners themselves will not get personal rebate checks — their income is too high. Eligibility to receive any check is phased out once 2007 adjusted gross income exceeds $87,000 for single filers and $174,000 on a joint return. Also, high-income taxpayers who do not qualify to receive the basic rebate check will not receive the additional $300 check that the new law provides for each child.