The incentives provided under the
Economic Stimulus Act of 2008 will
expire on Dec. 31. The legislation was designed to provide economic stimulus
through incentives for business investment.
It was originally estimated that businesses
would save $50 billion in near-term taxes
through a temporary change to the tax code
that allows companies purchasing new
equipment in 2008 to deduct up to $250,000
in qualifying capital expenditures as well as
reinstating bonus depreciation to allow businesses to deduct 50 percent of their capital
asset expenditures for 2008. With only a few
months left in 2008, CEOs must act now or
risk losing out on the opportunity.
“Essentially, for every dollar businesses
invest on assets this year, they’ll save up to 45
cents in tax benefits, lowering their effective
cost for purchasing the asset,” says Kevin
Krogstad, senior tax manager with Haskell &
White LLP. “Companies that need new manufacturing equipment, vehicles, computers
or office furniture should buy now to get the
tax savings. The equipment must be purchased and placed into service during 2008 to
qualify, so CEOs should review their needs to
avoid missing out on the benefit.”
Smart Business spoke with Krogstad
about the Economic Stimulus Act’s parameters and the associated tax savings.
What are the increased expensing limits
under the Economic Stimulus Act?
The Economic Stimulus Act increases the
annual expensing limit under IRC §179
from $128,000 to $250,000 beginning in
2008. The investment ceiling limitation was
also increased from $510,000 to $800,000.
Thereafter, the amount eligible to be
expensed is reduced dollar for dollar for
purchases exceeding the $800,000 ceiling.
For 2008, a taxpayer’s expensing limitation
is phased out completely for the year, once
its investment in qualified property reaches
$1,050,000.
It’s important to note that the maximum
amount that may be expensed under §179 is
limited to the amount of taxable income
resulting from the taxpayer’s active trades
or businesses, so effectively, your business
must be in the black to qualify. However, in
most instances, a taxpayer should still elect for the deduction, as making the election
will preserve the right to carry depreciation
forward to other years. Absent making the
election, the taxpayer can recover the cost
of the investment only through depreciation deductions spread over the applicable
recovery period.
Which businesses stand to benefit?
As a result of this incentive, most small
companies and even some midsized businesses with moderate capital equipment
needs will be able to obtain a full deduction
for the cost of business equipment and
machinery purchased in 2008, reducing
their effective cost for those assets. And
one more bit of good news, for federal tax
purposes, there’s no alternative minimum
tax (AMT) adjustment with respect to the
property expensed under §179.
Does the act reactivate the bonus depreciation benefit enacted under prior stimulus
packages?
Yes. The act provides 50 percent bonus
depreciation for both regular and alternative minimum tax purposes for ‘qualified
property’ acquired during 2008. The remaining 50 percent of the asset’s basis is eligible for regular depreciation deductions
over the asset’s applicable recovery period.
Qualified property is defined as having a
recovery period of less than 20 years, which
includes most office furniture, office equipment, computers, off-the-shelf computer
software, water utility property and qualified leasehold improvement property. The
property must be new, and there can’t be
any previous contracts showing the intent
to purchase the assets before 2008.
Does the act expand the deduction for luxury
autos?
The maximum first-year depreciation for
luxury autos has increased by $8,000, from
$2,960 to $10,960 for qualified autos, trucks
and vans placed into service in 2008. The
vehicle must meet a 50 percent business use
test to qualify. CEOs should note that the
maximum §179 deduction for sport utility
vehicles weighing more than 6,000 pounds
remains at $25,000.
Do these same benefits apply to California
tax calculations?
At this time, California has not adopted
the federal provisions. The maximum §179
deduction for California tax purposes is
$25,000, and because the property ceiling
for California is $200,000, the §179 deduction is completely phased out once qualified property additions for the year reach
$225,000. So as far as California is concerned, assets will continue to be depreciated over their applicable recovery periods.
CEOs should note that this may create significant federal versus California basis differences upon the ultimate disposition of
assets in the future.
In addition, taxpayers should be aware of
these differences when calculating taxable
income projections for purposes of making
estimated tax payments for 2008. Overall, if
these purchases will include assets your
business needs to expand or even maintain
its competitive advantage in the marketplace, the tax benefits might be too good to
pass up, but you’ll have to hurry.
KEVIN KROGSTAD is a senior tax manager with Haskell & White LLP. Reach him at [email protected] or (949) 450-6200.
