Article: Stimulus Act Benefits Individual and Business Taxpayers

March 2008

Stimulus Act Benefits Individual and Business Taxpayers

Much of the media coverage has focused on the tax rebate provisions, but the new law also encourages businesses to buy more capital goods and equipment in 2008

In February, Congress pass and President Bush signed into law H.R. 5140, the Economic Stimulus Act of 2008. The centerpiece of what we will call the “Stimulus Act,” which is designed to bolster a sagging economy, is a provision that puts extra cash into the hands of most Americans.

The majority of taxpayers will receive an income tax rebate this year that reflects their filing status and income as reported on their income tax return for 2007. While most of the rebates will be issued in 2008, some taxpayers will get a tax credit in 2009 when they file their returns for 2008. Still others, depending largely on their reported income in 2007 and 2008, may receive a combination of a rebate check in 2008 and an income tax credit in 2009.

The IRS will attempt to issue all payments as rapidly as possible to taxpayers who timely filed their 2007 tax returns. Taxpayers who file late or under extensions will receive their payments later.

Stimulus for Businesses

Much of the media coverage has focused on the Stimulus Act’s tax rebate provisions while paying relatively little attention to some other important elements of the new law. In at least two ways, the Stimulus Act encourages businesses to buy more capital goods and equipment in 2008, by:

nearly doubling (from $128,000 to $250,000) the expensing limit under Code Sec. 179 and boosting the overall investment limit from $510,000 to $800,000, effective for tax years beginning in 2008; and
allowing a bonus first-year depreciation deduction of 50% of the adjusted basis of qualified property (most personal property and software) acquired and placed in service after December 31, 2007, and before January 1, 2009. (The otherwise applicable “luxury auto” cap on first-year depreciation increases by $8,000 for vehicles that qualify. Bonus depreciation will be allowed for alternative minimum tax [AMT] as well as for regular tax purposes.)

Enhanced Sec. 179 Expensing. Under Code Sec. 179, a taxpayer (other than an estate, trust, and certain non-corporate lessors) can elect to deduct as an expense (rather than depreciate) up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in the taxpayer’s trade or business.

Old Law. Prior to passage of the Stimulus Act, a taxpayer could annually expense up to $125,000 for tax years beginning before 2011, with this amount annually adjusted for inflation (starting in tax years beginning after 2007). Thus, under pre-Stimulus Act law, the maximum expensing amount was $128,000 for tax years beginning in 2008. For tax years beginning after 2010, the maximum amount will be $25,000, with no annual adjustment for inflation.

The maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of Sec. 179 property placed in service during the tax year that is in excess of a specified investment ceiling. Under pre-Stimulus Act law, this investment ceiling limit was $500,000 for tax years beginning before 2011, with this amount annually adjusted for inflation (starting in tax years beginning after 2007). Thus, under pre-Stimulus Act law, the investment ceiling limit was $510,000 for tax years beginning in 2008. For tax years beginning after 2010, the investment ceiling limit will be $200,000, with no annual adjustment for inflation.

New Law. For tax years beginning in 2008, the Stimulus Act increases the $128,000 expensing limit to $250,000 and the overall investment limit from $510,000 to $800,000. The $250,000 and $800,000 amounts are not indexed for inflation.

50% First-Year Depreciation. The Job Creation and Worker Assistance Act of 2002 introduced bonus first-year depreciation as a temporary measure to stimulate the economy following the 9/11 terrorist acts. Bonus depreciation was subsequently enhanced by the Jobs and Growth Tax Relief Reconciliation Act of 2003. However, under prior law, bonus first-year depreciation generally was not available for property placed in service after 2004.

The 2008 Stimulus Act provides an additional 50% first-year depreciation for most types of new depreciable property placed in service in 2008.

For property placed in service after December 31, 2007, in tax years ending after that date, the Stimulus Act provides an additional depreciation deduction in the placed-in-service year equal to 50% of the adjusted basis of “qualified property.” With respect to new passenger vehicles, the Stimulus Act raises by $8,000 the first-year depreciation dollar cap for a new passenger auto that is “qualifying property.”

Qualifying Property. To qualify for the 50% first-year depreciation, an asset must be acquired after December 31, 2007, and before January 1, 2009. In addition, the asset must fall within one of four asset classes:

property to which MACRS (modified accelerated cost recovery) applies, with a recovery period of 20 years or less,
water utility property,
computer software (other than software covered by Code Sec. 197), or
qualified leasehold improvement property.

Original Use Requirement. The original use of the property must commence with the taxpayer after December 31, 2007. “Original use” is the first use to which the property is put, whether or not it corresponds to the taxpayer’s use of the property.

If, in the normal course of its business, a taxpayer sells fractional interests in property to unrelated third parties, the original use of that property begins with the first user of the fractional interest (i.e., each fractional owner is considered the original user of its proportionate share of the property).

Purchase Requirement. The taxpayer generally must purchase the property:

after December 31, 2007, and before January 1, 2009, but only if no binding written contract for the acquisition is in effect before January 1, 2008, or
pursuant to a binding written contract executed after December 31, 2007, and before January 1, 2009.

For a taxpayer that manufactures, constructs or produces property for the taxpayer’s own use, the requirements are satisfied if the taxpayer begins manufacturing, constructing or producing the property after December 31, 2007, and before January 1, 2009.

Placed-In-Service Requirement. Property generally must be placed in service after December 31, 2007, and before January 1, 2009. A one-year extension (to January 1, 2010) of the placed-in-service date applies to certain property with a recovery period of ten years or longer, and to certain transportation property. The property must have an estimated production period exceeding one year and cost more than $1 million.

Property Ineligible for Additional Depreciation Allowance. The following types of property are ineligible for the 50% additional first-year depreciation allowance:

property that must be depreciated under the alternative depreciation system (e.g., tangible personal property used predominantly outside the U.S.),
listed property (such as a passenger auto) that is not used more than 50% for business, and
qualified New York Liberty Zone leasehold improvement property.

Electing Out. The 50% additional first-year depreciation allowance applies to qualified property unless the taxpayer “elects out.” The election out may be made for any class of property for any tax year; if made, the election applies to all property in that class placed in service during that tax year.

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.