Business Tax Incentives & Opportunities under the

The Economic Stimulus Act of 2008

Action Required before 12/31/08!

 

Dear Clients and Friends:

The Economic Stimulus Act of 2008 (Stimulus Act), signed into law on February 13, 2008, contains two important tax benefits for businesses: a temporary reinstatement of bonus depreciation and an enhanced Section 179 deduction.  For calendar year taxpayers these benefits expire 12/31/08!  Fiscal year taxpayers should see the special rules discussed on pages 2 and 3.  Briefly, the two tax benefits are:

·         50% first-year bonus depreciation for new qualifying assets that are purchased and placed in service during calendar year 2008, including new autos used for business. In addition, 50% first-year bonus depreciation can be claimed for certain longer-lived new assets that are placed in service by 12/31/09.

·         $250,000 Section 179 deduction ($128,000 before the new law) for new or used qualifying assets that are placed in service in tax years beginning in 2008. Under the Section 179 deduction privilege, small and medium-sized businesses can immediately depreciate most or all of the cost of qualifying new and used assets in the year they are placed in service.

 

Bonus Depreciation Makes a Comeback but Expires 12/31/08

The Stimulus Act revives the 50% first-year bonus depreciation break for qualifying assets that are both acquired and placed in service during calendar 2008.  The placed-in-service deadline is extended through 12/31/09 for certain longer-lived assets (see below). 

Using the 50% first-year bonus depreciation, your business can immediately write off 50% of the cost of qualifying assets in the first year. The remaining cost can be written off via regular depreciation deductions over the asset’s designated recovery period.  There is no business income limitation as there is with Section 179 (discussed below), so bonus depreciation can be used to create a Net Operating Loss.  Bonus depreciation is automatic, however, businesses may elect out if desired. 

To be eligible for 50% first-year bonus depreciation, an asset must be: (1) qualified property (2) purchased new during calendar 2008 and (3) be placed in service by 12/31/08 (or by 12/31/09 for certain long-lived assets).  The IRS recently announced that it intends to issue more guidance on the 2008 bonus depreciation that will allow taxpayers to rely on the existing old regulations.

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Qualified Property                                                                                                                                                         To be qualified property, the asset must be new and fit within one of the following definitions:

·         Property with a depreciation recovery period of 20 years or less. This definition encompasses most tangible personal property used in business. It also includes land improvements (such as sidewalks, docks, fencing and billboards) and farm buildings.

·         Depreciable "off-the-shelf" computer software that is not amortizable over 15 years as part of business acquisition.  "Off-the-shelf" software is defined as software that is readily available for purchase by the general public

·         Water utility property.

·         Qualified leasehold improvement property (see below).

Only New Assets Are Eligible                                                                                                                       An asset is eligible for 50% first-year bonus depreciation only if its original use commences with the taxpayer after 12/31/07. In other words, the asset must be new.  The additional cost incurred to recondition or rebuild a used asset will apparently satisfy the original-use requirement. The cost of the used asset itself generally will not satisfy the requirement. However, old regulations provided a safe-harbor rule to determine when an asset can be considered entirely new after substantial reconditioning or rebuilding. According to the safe harbor, an asset that contains used parts will be considered an entirely new asset if the cost of the used parts is 20% or less of the total cost.

Special Rules for Fiscal Year Taxpayers                                                                                                                 Only assets purchased and placed in service between 1/1/08 and 12/31/08 are eligible for bonus depreciation.  For businesses whose fiscal years ends in 2008, bonus depreciation may be claimed only on assets acquired and placed in service from 1/1/08 through the end of that fiscal year.  The fiscal year filer will also be able to claim 50% bonus depreciation on their returns for the fiscal year ended in 2009, but only for assets acquired on or before 12/31/2008.  The IRS has issued a new Form 4562-FY to claim 50% bonus depreciation for assets acquired on or after 1/1/08. 

Certain Leasehold Improvement Costs Qualify                                                                                                           The 50% first-year bonus depreciation break is available for the cost of “qualified leasehold improvement property.” To meet this definition, all of the following tests must be passed.

·         The improvement must be to the interior portion of a building.

·         The building must be nonresidential real property.

·         The improvement must be made pursuant to or under a lease by either the lessee (or sub lessee) or the lessor to property that will be occupied exclusively by the lessee (or sub lessee).

·         The improvement must be placed in service more than three years after the date the building was first placed in service.

Certain improvements are ineligible by definition. These include the following:

·         Expenditures to enlarge a building.

·         Costs for any elevator or escalator, any structural component benefiting a common area, and any internal structural framework of a building.

·         Improvements made pursuant to leases between certain related parties.

 

Chapin, Owen & Sandstrom., PA, CPA's - Burtonsville, MD -  (301) 421-1330

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Impact of Bonus Depreciation on New Passenger Autos and Light Trucks                                            For a new passenger auto subject to the dreaded "luxury auto" depreciation caps, bonus depreciation increases the maximum first-year depreciation deduction by $8,000. For new passenger autos acquired and placed in service in 2008, the maximum first-year depreciation deduction is now $10,960 ($2,960 + $8,000). For new light trucks acquired and placed in service in 2008, the maximum first-year depreciation deduction is now $11,160 ($3,160 + $8,000). These amounts assume 100% business use.   The deduction will be prorated based on business use.  For instance, if a light truck were used 80% for business, the maximum first-year depreciation deduction would be only $8,928 (.80 × $11,160). 

Caution: Passenger autos and light trucks used 50% or less for business must generally be depreciated under the alternative depreciation system (ADS) straight-line method rather than under the regular MACRS rules. Such autos are therefore ineligible for bonus depreciation. Also, when bonus depreciation is claimed and business use drops to 50% or less in a subsequent year, the bonus depreciation amount is subject to recapture.

Exception for company provided vehicles:  Business use is considered to be 100% when the "value" of personal use is included in a non-owner/employee's W-2 as compensation.  For owners or partner/members, actual business use must be greater than 50% and the "value" of personal use must be included in the owner's compensation for business use to be considered 100%.

 

Enhanced Section 179 Deductions for Tax Years Beginning in 2008

The Stimulus Act also significantly enhances the Section 179 instant depreciation deduction for tax years beginning in 2008.  For calendar year taxpayers, only assets placed in service before 12/31/08 will qualify for the increased deduction. 

The increased limits are:

·         For tax years beginning in 2008, the maximum Section 179 deduction is increased to $250,000 (up from $128,000 before the new law). For tax years beginning in 2009 and later, the maximum deduction will revert back to $125,000 with inflation adjustments.

·         The deduction is phased-out once the business’s purchases during the year exceed $800,000 (up from $510,000 before the new law) for tax years beginning in 2008.  The increased phase-out threshold means more businesses will be eligible for Section 179 deductions in 2008. For tax years beginning in 2009 and later, the phase-out threshold will revert back to $500,000 with inflation adjustments.

Fiscal Year Taxpayers                                                                                                                                                              For fiscal year businesses, the increased Section 179 deduction and phase-out threshold do not take effect until the fiscal year beginning in 2008.  For example, a business with a June 30 fiscal year will only be able to take the increased Section 179 deduction for assets placed in service from 7/1/08 to 6/30/09.  You will want to time purchases accordingly.

Eligible Section 179 Property                                                                                                                Section 179 applies to new and used assets.  Most tangible personal property that is eligible for depreciation is eligible for Section 179.  "Off-the-shelf" computer software is also eligible.   Land improvements are generally not eligible for Section 179. 

Business Income Limitation for Section 179                                                                                        Section 179 is deductible only to the extent of net taxable business income.  It cannot be used to create a Net Operating Loss.  The excess over the limitation can, however, be carried over to subsequent years when there is taxable income to absorb the deduction.                                                                            

                                                                             

Chapin, Owen & Sandstrom., PA, CPA's - Burtonsville, MD -  (301) 421-1330

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Combining Bonus Depreciation and Section 179 on New Heavy SUVs            

The maximum Section 179 deduction for heavy SUVs is limited to $25,000. However, combining the $25,000 Section 179 deduction with the new bonus depreciation break can lead to potent tax-saving results (on a $60,000 SUV, the first year write-offs can amount to 76% of cost).  To qualify for both the Section 179 deduction and bonus depreciation, the SUV must be new, used 50% or more for business, and have a gross vehicle weight rating (GVWR) over 6,000 pounds.   Be prepared to produce the appropriate required documentation to substantiate business use. 

 

Coordination with Other Depreciation Rules         

The mid-quarter convention (instead of the mid-year convention) is required to be used to calculate first-year depreciation when more than 40% of the aggregate basis of the taxpayer’s depreciable property additions (excluding most real property) is placed in service during the last three months of the tax year. For this purpose, however, the amount of basis deducted under IRC Sec. 179 is not counted. Thus, a common general tax planning technique is to use the Section 179 privilege to expense the cost of assets added during the last three months of the year in order to fall beneath the 40% threshold and thereby avoid getting stuck with the mid-quarter convention.  This may not always yield the best result if there is a concentration of assets placed in service in the first or second quarter.

The full amount of basis for which bonus depreciation is claimed must be counted for purposes of the 40% test.  In other words, claiming bonus depreciation won’t help avoid the mid-quarter convention.

Bonus depreciation is claimed after reducing basis by the amount of any Section 179 deduction claimed for the same asset, but before calculating regular MACRS depreciation for the same asset.

 

Extended Placed-in-service Deadline for Longer-lived Assets.

The placed in service deadline for self-produced qualifying property with a depreciation recovery period of 10 years or longer, certain transportation property, and certain aircraft is extended to 12/31/09 (compared to the general placed-in-service deadline of 12/31/08).  Self-produced property must have a production period of greater than one year and cost more than $1,000,000.  Under this extended placed-in-service rule, only the portion of costs that are allocable to calendar 2008 are eligible for 50% first-year bonus depreciation.

 

Favorable Treatment Under AMT Rules

Bonus depreciation and Section 179 apply for both regular and AMT purposes. 

 

State Tax Treatment

The states will be all over the board as to whether they accept the 50% bonus depreciation and or the increased Section 179 deduction.  Some will "decouple" completely from the federal rules.  Last time around Virginia "decoupled" in the first year then decided to "recouple" later on.

 

 

Chapin, Owen & Sandstrom., PA, CPA's - Burtonsville, MD -  (301) 421-1330

 

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Getting the Most from Both Tax Breaks               

Under normal conditions (i.e., where the goal is to minimize taxable income), the Section 179 deduction should be used first to expense assets that are not eligible for bonus depreciation. That maximizes the amount of basis can be written off immediately under the Section 179 rules and the bonus depreciation rules. For example, use as much of the Section 179 allowance as possible for used equipment additions that are ineligible for bonus depreciation. Next, the Section 179 deduction should be used to expense assets with longer recovery periods. Take Section 179 on assets purchased in the last quarter of the year if it avoids the mid-quarter convention, as discussed above.  Again, this maximizes the amount of basis subject to a faster write-off. The bonus depreciation deduction then can be claimed for the remaining basis (after subtracting the Section 179 deduction).

Fiscal-year taxpayers should pay close attention to the dates they acquire assets, since they can’t assume that all their new asset purchases that qualify for bonus depreciation will also qualify for Section 179 expensing (and vice versa) due to the different placed in service rules. These taxpayers should time 2008 purchases carefully to make sure they get the best result. For example, a taxpayer planning to acquire a large used asset (that never will qualify for bonus depreciation) might budget that acquisition for its fiscal-year beginning in 2008 (to take advantage of the $250,000 Section 179 expensing limit) and use its acquisitions budget for the fiscal year ending in 2008 for assets eligible for bonus depreciation.

 

FINAL COMMENTS AND CIRCULAR 230 DISCLOSURE

Tax law constantly changes due to new legislation, technical corrections, cases, regulations and IRS rulings.  Our firm strives to closely monitor these changes and we will be glad to discuss any current tax developments and planning ideas with you.  Please contact us if you have questions or want additional information.

The information contained in this material represents a general overview of tax developments and should not be relied upon without an independent, professional analysis of how any of these provisions may apply to a specific situation.

Circular 230 Disclosure - Communications that may include tax advice:  Any tax advice contained in the body of this material was not intended or written to be used and cannot be used by the recipient for the purpose of (1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or (2) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

 

Chapin, Owen & Sandstrom., PA, CPA's - Burtonsville, MD -  (301) 421-1330