On Feb. 13, 2008, President Bush signed into legislation the Economic Stimulus Act of 2008.
While its benefits to individuals have been widely touted in the media, there are advantages available to businesses as well, including a number of tax incentives.
Smart Business spoke with Leslie Balmforth, principal and chief operating officer of Tauber & Balser, P.C., on its impact to businesses and how they can take advantage of the tax savings opportunities it provides.
What are the major business tax incentives of the new law?
The Economic Stimulus Act increases the Code Section 179 depreciation deduction and brings back bonus depreciation for 2008. The Internal Revenue Service Code provides an immediate expense deduction for taxpayers who elect to treat the cost of qualifying property, called Section 179 property, as an expense rather than a capital expenditure for the year the property is placed in service. Before the Economic Stimulus Act, the maximum Code Section 179 deduction for 2008 was limited to $128,000 of qualifying property. With the new law, the deduction will almost double to $250,000. For tax years beginning in 2009, the maximum deduction will be reduced to $125,000, adjusted for inflation. Qualifying property must be tangible depreciable business property (new or used), depreciable under Code Section 168, and acquired by purchase for use in the active conduct of a trade or business.
What are some of the limitations of the Section 179 deduction?
There are two main limitations to the Section 179 deduction: the taxable income limitation and the investment limitation. The taxable income limitation states that the total cost of property that may be expensed for any tax year cannot exceed the total amount of taxable income derived from the active conduct of any trade or business during the tax year. The amount disallowed as a result of the taxable income limitation can be carried forward to future years subject to certain limitations.
The investment limitation affects businesses that purchase a significant amount of assets during the course of a year by limiting the amount of the allowable Section 179 deduction. A business can lose part or all of its Section 179 write-off by reducing dollar for dollar the amount of qualifying assets in excess of the investment limitation for that year. The Economic Stimulus Act increased the threshold for 2008 to $800,000. In tax years beginning in 2009, the threshold will be reduced to $500,000, adjusted for inflation.
How will these deductions and limitations work?
These examples illustrate how these deductions and limitations will work:
- A business purchases qualifying new and used assets during 2008 in the amount of $225,000. Under the new law, the entire $225,000 can be written off as a Section 179 expense on its business tax return, provided the income limitation is met. Prior to the new law, only $128,000 would have qualified as a Section 179 deduction.
- A business purchases qualifying new and used assets during 2008 in the amount of $850,000. Since the investment limitation threshold under the new law has been increased to $800,000, only $50,000 of the excess investment purchase will need to be applied dollar for dollar against the eligible Section 179 deduction. This will result in a Section 179 deduction of $200,000 versus a zero deduction under the old law.
How does the bonus depreciation work, and how does it impact the business taxpayer?
The new law also provides business taxpayers with 50 percent bonus depreciation for qualifying property. Under first year bonus depreciation, a business can deduct half of the cost of a new asset and write off the remaining cost with the Section 179 deduction (if available) and/or regular depreciation deductions during the asset’s recoverable life. In essence, businesses can take advantage and utilize both the increased Section 179 deduction amounts and the bonus depreciation to reduce a significant amount of their taxable income.
For property to qualify, it must be purchased and placed in service by Dec. 31, 2008, or by Dec. 31, 2009, for certain long-lived assets.
Check with your tax adviser to see what property qualifies for the bonus depreciation and for more information on the new Economic Stimulus Act of 2008 and how it can benefit your business or you individually.
LESLIE BALMFORTH, CPA, is a principal at Tauber & Balser, P.C. and serves as chief operating officer. She is responsible for managing the financial and operational aspects of the firm including human resources, marketing, employee benefits, technology, facilities management, cash management and internal accounting. Reach her at (404) 814-4985 or email@example.com.