Lux & Associates CPA, INC

According to a lot of pundits, the U.S. economy looks to be slipping into a recession. The leading economic indicators seem to be heading south; housing starts are down and foreclosures are up. Adding up all the recent bad economic news, and mixing in the fact that 2008 is a presidential election year, Congress and the President felt it would be a good idea to try and give a boost to the country’s $13 trillion economic engine; hence, the birth of the Economic Stimulus Act of 2008 (the Act).

The Act provides about $107 billion in cash to taxpayers in 2008, which Congress hopes will be spent, and $45 billion in tax relief to business. We discuss the individual taxpayer rebates in the Tax and Accounting article this month and will address the business aspects in this article.

Tax breaks offered to businesses come in the form of increased expensing of equipment purchases and the allowance of 50% bonus depreciation for 2008. These are the same type incentives offered in the wake of the economic downturn after the September 11, 2001 terrorist attacks and the Gulf Coast Hurricanes in 2005. Interestingly enough, the biggest tax break comes from the allowance of the bonus depreciation and not the increase in the election to expense equipment purchases.

Increase in Expensing Equipment Purchases

Under prior law, a business could deduct up to $128,000 in equipment purchases in a year instead of depreciating the equipment over more than one year. If the cost of qualified property exceeded $510,000, the deduction started phasing out. The new law increases the amount that’s deductible under Code Section 179 to $250,000 for 2008. It also increases, to $800,000, the point at which businesses start losing Code Section 179 benefits.

There is no change in the definition of qualifying property under the new law. Basically, any tangible personal property that is actively used in a trade or business, and for which a depreciation deduction is allowable, will qualify. The property must also be used more than 50% for business purposes. Off-the-shelf computer software is qualifying property for purposes of the expense election.

As in all laws, wording is everything. It’s important to note that the increased deduction is for qualifying property purchased in a taxpayer’s year that begins in 2008. For example, assume your business is on an August 1 to July 31 year-end. The year you are currently in started in 2007 and any purchases before August 1, 2008 will still be subject to the $128,000 and $510,000 limitations. Beginning in August 2008 and ending on July 31, 2009, though, your business will be subject to the higher limits.

The Congressional Joint Committee on Taxation estimates this tax reduction will amount to a whopping $1 billion. At the median tax rate of all taxpayers (around 14.3%), this amounts to perhaps an additional $7 billion in qualifying purchases.

The Really Big Prize

There are a number of reasons the increase in the 179 expense deduction does not yield significant tax savings. Businesses must first have taxable income to avail themselves of the deduction and the limitations, however generous. Still excluded are a large group of taxpayers who invest millions and billions in new equipment each year. The allowance of 50% first year bonus depreciation does not suffer from these limitations.

To be eligible for the 50% bonus depreciation, property must be placed in service after December 31, 2007 and before January 1, 2009. Property eligible for this increased depreciation must 1) be eligible for MACRS depreciation and have a recovery period of 20 years or less; 2) be off-the-shelf computer software; 3) be water utility property; or 4) be qualified leasehold property. In addition, the use of the property must originate with the taxpayer - used equipment will not qualify for the 50% bonus depreciation.

Certain property will be allowed a one-year extension of the placed-in-service date, including: property with a greater than 10 year recovery life, transportation equipment, and equipment purchased under a binding written contract entered into after December 31, 2007 and before January 1, 2009. The new law will allow a maximum first year deduction for luxury automobiles of $11,060.

The Joint Committee on Taxation estimates this provision will decrease tax revenue by $44 billion in 2008, but the government will recoup this in the future through decreased depreciation deductions.

Parting Thoughts

It remains to be seen whether the Act will actually jump start the U.S. economy; however, what is certain is that it gives business taxpayers a powerful incentive to purchase equipment in 2008. If you are planning to purchase equipment that would qualify for the new tax rules, consider buying it in 2008, even if you had previously planned on a 2009 purchase. As with everything in life, timing is the key to maximizing your capital equipment dollar. Give us a call and let’s look at a few scenarios before you make your next big purchase.

Have a terrific month!