The Economic Stimulus Act of 2008 was
created in an effort to bolster the flagging economy. Designed to stimulate capital investment by businesses and professionals, the new provisions include tax
breaks in the form of increased depreciation
write-offs.
In order to take full advantage of the Stimulus Act, it is important to take a proactive
approach, says Barbara Rosenbaum, executive vice president of Gumbiner Savett Inc.
“Taxpayers working on a new construction
project or adding leasehold improvements in
2008 can proactively work with their
accountants to identify qualifying property,
and then ask their architect, engineer or contractor to be sure those items are identified
and billed separately,” she says.
Smart Business spoke with Rosenbaum
about the new depreciation rules, how a
company can take advantage of the new tax
rules and why it’s so important to stay
abreast of changes to the tax code.
What are the new rules regarding depreciation?
The rebate for individual taxpayers was the
most publicized piece of the Economic
Stimulus Act of 2008, yet there are two major
provisions that businesses need to focus on:
bonus depreciation and increased Section
179 expensing. A substantial one-year
increase in the maximum amount of qualified
property that can be expensed (from
$128,000 to $250,000 during 2008) is accompanied by increases to the phase-out threshold (from $510,000 to $800,000). That means
if taxpayers add more than $1,050,000 in qualifying property, they have no Section 179
deduction. This deduction is limited to the
taxable income of the trade or business,
though the nondeductible amount can be
carried forward indefinitely.
The new bonus depreciation rules are back
for a limited time. They allow a taxpayer 50
percent first-year bonus depreciation on
qualified property that meets all three of
these requirements:
- Original use must begin with the taxpayer after Dec. 31, 2007 (no used property),
- must be acquired after Dec. 31, 2007 and be placed in service after Dec. 31,
2007, and before Jan. 1, 2009.
Why were these changes adopted?
In the past, Congress has used bonus depreciation, as well as increased expensing of
assets, to encourage business investment.
With the economy ailing, Congress is hoping
these new rules, available for a limited time
only, will increase business investment,
which will in turn act to stimulate the economy. We have seen this tool used before, for
example, post Sept. 11, 2001.
When do the new rules become effective?
To qualify for bonus depreciation or the
increased expense allowance, property must
be purchased and placed in service in 2008.
Be careful, as there are differences in the definition of qualified assets. For bonus depreciation the original use of the property must
begin with the taxpayer and has to occur
after Dec. 31, 2007, and before Jan. 1, 2009.
The expensing rules are more expansive.
How do the new depreciation rules interact
with pre-existing cost-recovery rules?
The IRS has acknowledged that questions
may arise as taxpayers evaluate the benefits
of the new 50 percent bonus depreciation. As
this ‘new’ bonus depreciation is patterned
after prior provisions, and to keep it simple,
the IRS is allowing taxpayers to rely on prior
regulations (with appropriate adjustments
for dates, etc.) until new guidance is issued.
How do the new depreciation rules interact
with the increased expensing election?
The interaction of the expensing and the
bonus deprecation rules make for some fat
deductions. The sections must be applied in
a specified sequence to purchases of qualifying assets that are placed in service in 2008:
first, expensing under Section 179 (an elective provision); second, the bonus depreciation (a mandatory provision unless one
elects out); finally, MACRS depreciation
applies. The basis of the asset is reduced after
each step, decreasing the basis before application of the next rule.
How can a company best take advantage of
the new tax rules?
Plan and project. Taxpayers can control
their deduction by electing to expense (or
not) under Section 179 and by accepting or
electing out of bonus depreciation by class,
by entity or altogether. Most people don’t
realize that bonus depreciation is mandatory
unless you choose to elect out. Effective use
of elections can maximize deductions.
Be attentive. The timing of asset purchases
can impact the availability of Section 179
expensing. If you are going to be buying
equipment costing more than $1 million, and
you want to maximize your 2008 deductions,
think about deferring a portion of the acquisition until 2009.
Work with someone who can get you the
information you need. Look beyond the general rules. For example, the original use
requirement has a special rule that applies to
property placed in service in 2008, sold and
then leased back within three months. Every
rule has an exception and every exception
has its own exception.
Be flexible. Examine written binding contracts entered into before Jan. 1, 2008, for
substantial modifications that can be made in
2008 to qualify for bonus depreciation.
BARBARA ROSENBAUM is executive vice president of Gumbiner Savett Inc. Reach her at [email protected] or (310) 828-9798.
