Magazine article The CPA Journal

Economic Stimulus Act of 2008: Analysis of Major Provisions

Magazine article The CPA Journal

Economic Stimulus Act of 2008: Analysis of Major Provisions

Article excerpt

Although the Economic Stimulus Act of 2008 provides only a few incentives for businesses to purchase additional equipment, it provides the much-publicized rebate checks for individuals. The business incentives are basically limited to enhanced write-off provisions for new equipment purchases. Because the Act was rushed through the House, and the Senate was pressured to quickly adopt the House version with few changes, members of Congress were unable to fill the Act with earmarks or pork-barrel projects.

Business Incentives

IRC section 179 expense. The Economic Stimulus Act provides taxpayers (other man estates, trusts, and certain noncorporate lessors) with a significant opportunity to expense business investments under IRC section 179. Present law permits taxpayers to expense up to $128,000 of the cost of new or used depreciable tangible property purchased for use in the active conduct of a trade or business (including off-the-shelf computer software placed in service prior to 2011) in lieu of depreciating the property. The $128,000 is reduced (but not below zero) by the amount that investments in qualifying property exceed $510,000 (the phaseout threshold). The 2008 Act increases the $128,000 limit to $250,000 and the $510,000 limit to $800,000, for taxable years beginning in 2008. These new amounts are not indexed for inflation, and no IRC section 38 general business credit is allowed for the amount expensed under section 179.

To illustrate these rules, assume a calendar-year taxpayer purchases $850,000 of qualifying depreciable property and places it in service in 2008. The IRC section 179 expense is calculated as follows: $250,000 (the maximum deduction under section 179) - [$850,000 (qualifying purchase) - $800,000 (the phase-out threshold)] = $200,000 of section 179 expense allowed.

The Act also increased the expensing limitation and investment limit for empowerment zones, renewal communities, and Gulf Opportunity (GO) zones.

In addition to the aforementioned investment limitation, the amount eligible for expensing under IRC section 179 may not exceed the taxpayer's taxable income derived from the active conduct of a trade or business for the year, calculated before the section 179 expense. Any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding years, subject to similar limitations. Still in effect is the provision from an earlier law that in 2011 and thereafter, limits taxpayers to a $25,000 deduction for qualifying property; that amount is reduced by the amount by which the cost of qualifying property exceeds $200,000. Also beginning in 2011, off-the-shelf computer software is no longer eligible for expensing under IRC section 179.

Before investing in new property, a taxpayer should be cautioned that the law is applicable only to purchases made for tax years beginning in 2008. Fiscal-year taxpayers must time their purchases accordingly. There is no restriction on when during the taxable year the property is placed in service (i.e., no mid-quarter conventions), so purchases made in the last month of the taxable year or in a short tax year may be fully expensed subject to the above limitations. There is no adjustment to AMT for property expensed under IRC section 179. The benefits of immediately expensing newly acquired property can reduce the cost, while increasing cash flow by the additional reduction in federal income taxes caused by immediately expensing the cost of newly acquired equipment. Sole proprietors and passthrough entities will have lower adjusted gross income (AGI), which increases their opportunity to benefit from itemized deductions and the personal exemptions.

Additional first-year depredation. The amount of property that can be depreciated is limited by the modified accelerated cost recovery system (MACRS). The time period for cost recovery prescribed for different types of personal property is three to 25 years. …

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