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 firstname.lastname@example.org or (310) 828-9798.