By Peter Watts
The Economic Stimulus Act of 2008 provides significant incentives to encourage businesses to purchase equipment. These incentives include an increase in the small business expensing limitation for the 2008 tax year, as well as a special 50 percent depreciation allowance for 2008 purchases.
Fifty Percent Special Depreciation Allowance
Depreciation allows a taxpayer to recover the cost of capital expenditures over a period of years in the form of an income tax deduction. The depreciation deduction is an annual allowance for the portion of the properties' useful life used up during the year.
Under the new law, taxpayers may be entitled to depreciate 50 percent of the cost of qualified property during the year the property is placed in service. This is similar to the special depreciation allowance that was previously available for qualified property placed in service before January 1, 2005. To qualify for the 50 percent special depreciation allowance under the new law, the property must be placed in service during the 2008 calendar year. The 50 percent depreciation allowance is not available if a binding contract to purchase the equipment was entered into prior to 2008. The IRS is currently developing a new version of the depreciation and amortization form for fiscal year filers. The IRS has announced that the new form will be designated as the 2007 Form 4562-FY.
Section 179 Expensing
In some circumstances, taxpayers can elect to treat the cost of certain property as an expense. This allows the taxpayer to deduct the cost of the property in the year the property is placed in service, instead of depreciating the cost over several years. The property is often referred to as Section 179 property. Under the new law, a qualifying business can expense up to $250,000 of Section 179 property purchased by the taxpayer beginning in tax year 2008. Prior to the legislation, the 2008 expensing limit for Section 179 property was $128,000. The $250,000 amount provided under the new law is reduced if the cost of all Section 179 property placed in service by the taxpayer during the tax year exceeds $800,000.
One important caveat to keep in mind is that the new law does not alter the Section 179 limitation imposed on sport utility vehicles, which have an expense limit of $25,000.
If you have questions about how your business may be able to utilize the provisions of the Economic Stimulus Act, please contact a tax attorney or an accounting professional.