2008 Business Incentives
Economic Stimulus Act of 2008 includes several business provisions intended to jump-start the economy, in part through tax incentives aimed at encouraging businesses to increase their investments in new equipment by the end of 2008. Under the Act, small businesses will be able to write off up to $250,000 of qualifying capital expenditures in 2008. In addition, businesses will be able to deduct an additional 50% of the cost of certain capital expenditures in 2008.

Boosted Section 179 expensing. Under pre-Act law, taxpayers can expense up to $128,000 of qualified business property for 2008 in lieu of taking depreciation over a certain amount of tax years. This annual expensing limit is reduced on a dollar for dollar basis by the amount that the cost of qualifying property placed in service exceeds $510,000. The expensing rules are eased for qualifying empowerment zone property, renewal property and Gulf Opportunity (GO) Zone property. The amount of the expensing deduction is limited to the amount of taxable income from any of the taxpayer's active trades or businesses.

Under the new Act, for tax years beginning in 2008, the $128,000 one-time expensing limit is increased to $250,000, and the overall limit before the phase-out applies is increased from $510,000 to $800,000. After $800,000 of qualified additions, the maximum allowable Section 179 deduction is reduced on a dollar for dollar basis up to $1,050,000 of qualified additions. As a result of this incentive, many businesses with moderate capital equipment needs will be able to obtain a substantial deduction for the cost of qualified business property placed in service in 2008. Note that there is no alternative minimum tax (AMT) adjustment with respect to property expensed under these new increased limits.

Bonus depreciation makes a comeback. Bonus first year depreciation was first introduced following the terrorist attacks of 2001 but generally was not available for property acquired after 2004, except for certain qualified GO Zone property from Hurricane Katrina relief provisions.

The Act provides for bonus (accelerated) depreciation by allowing a bonus first-year depreciation deduction of 50% of the adjusted basis of qualified property placed in service after Dec. 31, 2007, and before Jan. 1, 2009. The basis of the property and the depreciation allowances in the year the property is placed in service and later years are adjusted to reflect the additional first-year depreciation deduction. The amount of the additional first-year depreciation deduction is not affected by a short taxable year. The taxpayer may elect to opt out of utilizing additional first-year depreciation.

The interaction of the additional first-year depreciation allowance with the otherwise standard depreciation deduction may be illustrated as follows. Assume that a taxpayer purchases new depreciable equipment and places it in service in 2008. The property's cost is $10,000 and it is 5-year property subject to the half-year convention. The amount of additional first-year bonus depreciation allowed under the new provision is $5,000. The remaining $5,000 of the cost of the property is depreciated under the rules applicable to 5-year property. Thus, 20 percent of the $5,000 remaining basis, or $1,000, is also allowed as a standard depreciation deduction in 2008. Accordingly, the total depreciation deduction with respect to the property for 2008 is $6,000 ($5,000 bonus plus $1,000 standard depreciation). The remaining $4,000 cost of the property is recovered over the remaining class life until fully depreciated.

Bonus depreciation is allowed for AMT purposes as well as for regular tax purposes. Additionally, bonus depreciation is permitted only for: (1) property to which MACRS applies that has an applicable recovery period of 20 years or less,
(2) water utility property, (3) non-custom-made computer software, and (4) qualified leasehold improvement property. Original use of the property must begin with the taxpayer after Dec. 31, 2007. The placed-in-service cutoff date is extended for an additional year (i.e., before Jan. 1, 2010) for certain property with a recovery period of ten years or longer and certain transportation and aircraft property. Also note that the otherwise applicable "luxury auto" cap on first-year depreciation is increased by $8,000 for vehicles that qualify.

For state purposes, it is unknown at this time how each individual state will react to the new bonus depreciation and Section 179 incentives. Note that historically, many states have decoupled from federal provisions like bonus depreciation or have implemented much lower ceilings on the maximum Section 179 deduction. It is advisable to review and address any state law differences upon filing 2008 state business returns.

Michael A. Indenbaum

Honigman Miller Schwartz and Cohn LLP
660 Woodward Avenue
2290 First National Building
Detroit, MI  48226-3506