Economic Stimulus Act of 2008
Depreciation Business Provisions to Accelerate Tax Savings
There are two business provisions of the Economic Stimulus Act of 2008.
Section 179 Expensing
Internal Revenue Code 179 allows for a certain dollar amount of fixed asset purchases to be expensed in the year of purchase rather than spreading the cost over the life of the asset via regular depreciation. Taking advantage of Internal Revenue Code (IRC) 179 has always been limited to businesses that purchase under a certain dollar amount of fixed assets each year. The limit under this act has been increased from $510,000 to $800,000.
There is also a limit on the dollar amount of the special expensing. Way back in the day this limit was $17,500. Over the years, it’s gone up to $128,000. Under the Business Provision of the Economic Stimulus Act of 2008, this limit has been increased to $250,000 – almost a 100% increase.
Who Qualifies for the New Internal Revenue Code 179 Provisions?
The fixed asset must be purchased and placed in service during the 2008 tax year. For those using a calendar tax year that’s January 1 through December 31. If one uses a fiscal year, it would apply to purchases made during the 2008 fiscal year.
Remember, Internal Revenue Code 179 under the new provision, as before, can't throw a business into a loss. IRC179 can only be used to reduce taxable income to zero.
Here’s an Example of the Internal Revenue Code 179 Expensing
A business buys a new computer system for $25,000. Its taxable income is $100,000 and total asset purchases during the year totaled $175,000. The entire cost of the computer system, $25,000, can be expensed in 2008, reducing taxable income to $75,000 and reducing the adjusted basis of the computer system to zero.
The Second Provision - Special Depreciation Allowance
For property acquired and placed in service during the calendar year 2008, business can take a special 50% depreciation allowance. Operate under a fiscal year? Sorry, the January to December calendar requirement applies to those businesses as well.
How the Special Depreciation Allowance Works
The adjusted basis of the asset is figured and 50% of that dollar amount can be expensed in 2008 via the depreciation Form 4562.
Here’s an example of how it works:
A machine is purchased and placed in service in November 2008. Its total purchase price and cost to modify and install is $100,000. The business doesn't opt to take any IRC179 depreciation on this piece of equipment in 2008. The total dollar amount expensed in 2008 is $50,000. The business can also take regular depreciation on the remaining $50,000 during 2008.
Just remember, the business provision allows for an acceleration of depreciation expensing only. The total amount of deprecation taken for each fixed asset can’t be more than its adjusted cost basis. If the business writes off an extra $100,000 in 2008 under the business provision, that’s $100,000 less in depreciation can be written off in subsequent years.
Source:
Internal Revenue Service June 2008 tax release
