Uncle Sam Wants to Help You Grow Your Business
On February 13, 2008, President Bush signed The Economic Stimulus Act of 2008 into law. This law has two provisions that may reduce your cost of investing in new equipment for your business. This bill increased the expensing limits for small business and includes a 50% bonus depreciation provision. If your business qualifies, you may be able to take advantage of both.
Section 179 - Expanded Expensing for Small Businesses
Companies that purchase less than $800,000 of capital assets in a year now can expense (i.e., deduct currently) the first $250,000 of capital investment, effective for purchases made in 2008 (the prior limits for 2008 were $128,000 and $510,000 respectively).
Accelerated Depreciation for All Businesses
The new law also includes a new 50 percent expensing allowance (also known as bonus or accelerated depreciation) that generally applies to capital equipment purchased and placed in service during 2008. This incentive is available to all companies, regardless of the size of their investment.
Under this provision, companies are eligible for a “bonus” first-year depreciation totaling 50 percent of the cost of the investment and can depreciate the remaining basis of the asset under the regular depreciation rules. Smaller companies get even more of a “bonus.” As described above, they can first take advantage of expensing and then also use the 50 percent expensing allowance.
For example, as qualifying business owner, if your company buy a $250,000 machine you can deduct the total cost of the equipment the year it’s purchased. If the equipment costs more than $250,000, but your company spends less than $800,000 on capital equipment during 2008, your company can couple expanded expensing with accelerated depreciation (see below). Under these provisions, a $300,000 machine that is MACRS 5-year property would qualify for a $280,000 first year deduction (93 percent of the cost of the asset); and a $500,000 machine could qualify for a $400,000 first year deduction (80 percent of the cost of the asset).
QUALIFIED PROPERTY
In order for property to qualify for the bonus depreciation deduction, it must meet the following requirements.
First, the property must be one of the following types of property: (1) property to which the general rules of MACRS apply having a recovery period of 20 years or less, (2) water utility property, (3) computer software other than computer software recovered under section 197, or (4) be qualified leasehold improvement property.
Second, the original use of the property must commence with the taxpayer after December 31, 2007. Original use means the first use to which the property is put by anyone.
Third, the property must be purchased within the applicable time period (after December 31, 2007 and before January 1, 2009).
Finally, the property must be placed in service after December 31, 2007 and before January 1, 2009. With respect to self-constructed property, an extended placed-in-service date is allowed if the production period exceeds two years or has an estimated production period exceeding one year and a cost exceeding $1 million.
Here's How it Works
The 50 percent bonus depreciation deduction is computed first. The bonus deduction reduces the adjusted basis of the property before computing the amount otherwise allowable as depreciation deduction under section 167(a). For example, assume that on March 1, 2008, your company acquires and places in service qualified property that costs $1,000,000. Under the new law, your company is allowed a first year bonus depreciation deduction of $500,000. The remaining $500,000 of adjusted basis is recovered in 2008 and subsequent years pursuant to the depreciation rules of present law. Assuming the qualified property was MACRS five-year property, your company would be allowed to recover 20 percent of the remaining adjusted basis of $500,000 -- or $100,000 -- in 2008. The total depreciation deduction for the MACRS five-year class life property would be equal to $600,000 ($500,000 + $100,000) or 60 percent of the adjusted basis of the property originally placed in service in 2008.
This article does not constitute tax, legal, or other advice. We assume no responsibility with respect to assessing or advising you as to tax, legal, or other consequences arising from your particular situation. Ask your accountant if you qualify.
