June 25, 2008 - In addition to stimulus checks for individuals, the Economic Stimulus Act of 2008 has given businesses two valuable incentives: the Code Section 179 expensing provision has been enhanced, and bonus depreciation has re-surfaced, benefiting virtually all businesses, whether incorporated or not.

First, the expensing provision of Section 179 has been doubled to $250,000 and increases the investment threshold for the phase out to $800,000. This provision of the law allows a company to fully write off (expense) an asset in the year of purchase. This applies to property purchased and placed into service for taxable years beginning in 2008. Most small and medium-sized businesses will be eligible to take advantage of this change. However, due to the investment dollar limitations companies with purchases greater than $800,000 may not be able to take full advantage of this newly enhanced law.

Second, bonus depreciation has returned for the 2008 calendar year. Bonus depreciation allows a company to write off 50% of an asset’s cost as an expense in the current year, via depreciation expense, in addition to the regular depreciation expense amount that is normally allowed. Eligible property that is purchased and placed in service after December 31, 2007, and before January 1, 2009, will be eligible for bonus depreciation. Keep in mind that bonus depreciation must be claimed for both regular and alternative minimum tax. Taxpayers have the option to exclude an eligible asset class from bonus depreciation. 

As previously stated, the Sec 179 expensing provision is available for tax years beginning in 2008.  Generally speaking, a calendar year entity’s tax year begins on January 1 and ends 12 months later on December 31. An entity can also have a “fiscal year,” that is, one that starts on a date other than January 1^st and ends on the last day of the twelfth month. It can have an end date or a start date shorter than twelve months due to a business termination/combination – also called a short tax year. 

However, assets eligible for bonus depreciation must be purchased and placed in service after December 31, 2007 and before January 1, 2009.  It is not dependent upon an entity’s taxable year start date.

Let’s assume that a corporation has a fiscal year start date of October 1, 2007 and an ending date of September 30, 2008.  Since the taxable year starts in 2007, the enhanced Section 179 expensing limit will not be allowed until October 1, 2008 – the start of its 2008 taxable year.  Prior to that, the 2007 current year limitations of $125K/$500K must be used. Bonus depreciation will be allowable for eligible assets that are purchased and placed in service any time from January 1, 2008 through December 31, 2008.

These new law changes will not alter the filing of the 2007 calendar year tax returns; however, they will have an impact on the tax planning process for 2008.

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