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February 15, 2008

The package that the House and Senate passed, and President Bush approved, on February 13, 2008 has tax implications for businesses as well as individuals.  In addition to the rebate checks for individual filers, the package includes two tax incentives for businesses.  These incentives do NOT impact tax year 2007 returns (so there will be no need to file an amended return), but affect property purchased and placed in service in tax year 2008.  The purpose of these changes is to encourage business investment (with the expectation of stimulating the economy further).

Enhanced Code Sec. 179 Expensing

The definition of qualifying property remains the same – it must be tangible personal property, which is actively used in the taxpayer’s business and for which a depreciation deduction would be allowed.  It must be used more than 50% for business and must be a newly purchased property. 

The changes:

For tax year 2007, Section 179 expensing was limited to $128,000.  The package nearly doubles that amount to $250,000.  It also increases the threshold that reduces the deduction from $510,000 to $800,000.  Under the new law, Section 179 expensing phases out completely if qualifying purchases exceed $1,050,000 during the tax year 2008.

Temporary Bonus Depreciation

This law gives qualifying taxpayers a 50% first-year bonus depreciation of the adjusted basis of qualifying property.

To take advantage of this, property must:

  1. Be eligible for MACRS with a depreciation period of 20 years or less;
  2. Be a water utility property, computer software (off-the-shelf), or a qualified leasehold property. 
  3. It must be purchased and placed in service during 2008 (the property needs to be purchased and placed in service after December 31, 2007 and before January 1, 2009).  “Purchased” means that you cannot have a binding written contract prior to January 1, 2008 for the property.

Bonus depreciation needs to be claimed for regular tax AND alternative minimum tax (AMT) liability.  The only option to change this is for the taxpayer to elect out – but once that election is made, it cannot be revoked without IRS consent.