Stimulus Act of 2008
Analysis of Major Provisions
James F. Hopson
JUNE 2008 - Although
the Economic Stimulus Act of 2008 provides only a few incentives
for businesses to purchase additional equipment, it provides the
much-publicized rebate checks for individuals. The business incentives
are basically limited to enhanced write-off provisions for new equipment
purchases. Because the Act was rushed through the House, and the
Senate was pressured to quickly adopt the House version with few
changes, members of Congress were unable to fill the Act with earmarks
or pork-barrel projects.
section 179 expense. The Economic Stimulus Act provides
taxpayers (other than estates, trusts, and certain noncorporate
lessors) with a significant opportunity to expense business investments
under IRC section 179. Present law permits taxpayers to expense
up to $128,000 of the cost of new or used depreciable tangible
property purchased for use in the active conduct of a trade or
business (including off-the-shelf computer software placed in
service prior to 2011) in lieu of depreciating the property. The
$128,000 is reduced (but not below zero) by the amount that investments
in qualifying property exceed $510,000 (the phaseout threshold).
The 2008 Act increases the $128,000 limit to $250,000 and the
$510,000 limit to $800,000, for taxable years beginning in 2008.
These new amounts are not indexed for inflation, and no IRC section
38 general business credit is allowed for the amount expensed
under section 179.
these rules, assume a calendar-year taxpayer purchases $850,000
of qualifying depreciable property and places it in service in
2008. The IRC section 179 expense is calculated as follows: $250,000
(the maximum deduction under section 179) – [$850,000 (qualifying
purchase) – $800,000 (the phase-out threshold)] = $200,000
of section 179 expense allowed.
The Act also
increased the expensing limitation and investment limit for empowerment
zones, renewal communities, and Gulf Opportunity (GO) zones.
to the aforementioned investment limitation, the amount eligible
for expensing under IRC section 179 may not exceed the taxpayer’s
taxable income derived from the active conduct of a trade or business
for the year, calculated before the section 179 expense. Any amount
that is not allowed as a deduction because of the taxable income
limitation may be carried forward to succeeding years, subject
to similar limitations. Still in effect is the provision from
an earlier law that in 2011 and thereafter, limits taxpayers to
a $25,000 deduction for qualifying property; that amount is reduced
by the amount by which the cost of qualifying property exceeds
$200,000. Also beginning in 2011, off-the-shelf computer software
is no longer eligible for expensing under IRC section 179.
in new property, a taxpayer should be cautioned that the law is
applicable only to purchases made for tax years beginning in 2008.
Fiscal-year taxpayers must time their purchases accordingly. There
is no restriction on when during the taxable year the property
is placed in service (i.e., no mid-quarter conventions), so purchases
made in the last month of the taxable year or in a short tax year
may be fully expensed subject to the above limitations. There
is no adjustment to AMT for property expensed under IRC section
179. The benefits of immediately expensing newly acquired property
can reduce the cost, while increasing cash flow by the additional
reduction in federal income taxes caused by immediately expensing
the cost of newly acquired equipment. Sole proprietors and pass-through
entities will have lower adjusted gross income (AGI), which increases
their opportunity to benefit from itemized deductions and the
first-year depreciation. The amount of property
that can be depreciated is limited by the modified accelerated
cost recovery system (MACRS). The time period for cost recovery
prescribed for different types of personal property is three to
25 years. The Economic Stimulus Act allows taxpayers to take an
additional first-year depreciation deduction in addition to the
MACRS deduction equal to 50% of the adjusted basis of qualified
new property acquired after December 31, 2007, and before January
1, 2009. Property subject to binding contracts entered into prior
to January 1, 2008, but placed in service during 2008, is ineligible.
Binding written contracts for qualified property entered into
after December 31, 2007, and before January 1, 2009, are eligible,
however, with the limitation discussed below.
apply to qualified leased property. If a taxpayer places property
in service after December 31, 2007, sells the property, then leases
it back within three months after the original date the property
is placed in service, then the property is treated as originally
placed in service no earlier than the date the property is placed
in service under the lease.
is allowed for both regular income tax and the AMT in the tax
year the property is put into service, but property basis must
be reduced by the amount deducted before computing the MACRS amount
for the current tax year and later years. The additional first-year
depreciation is not affected by short tax years, and the taxpayer
may elect out.
assume that in 2008 a taxpayer purchased and placed in service
a new depreciable property that is not eligible for IRC section
179 expensing. The property cost $1,000 and is a five-year property
subject to the half-year convention. The amount of additional
first-year depreciation allowed under the new law is $500. The
remaining $500 of the cost is deductible under the rules applicable
to a five-year MACRS property. Therefore, 20%, or $100, is allowed
as a depreciation expense in 2008. The total depreciation deduction
for 2008 is $600. The remaining $400 cost of the property is recovered
under the otherwise applicable depreciation rules.
property is defined as follows:
to which MACRS applies, with an applicable recovery period of
20 years or less;
utility property defined in IRC section 168(e)(5);
software other than that covered by IRC section 197 (basically,
computer software that is readily available for purchase by
the general public, is subject to a nonexclusive license, and
has not been substantially modified); or
leasehold improvement property defined in IRC section 168(k)(3)
(basically, improvement to an interior portion of a leased building
that is nonresidential real property).
the property must be acquired after December 31, 2007, but before
January 1, 2009, and placed in service after December 31, 2007.
An extension of the placed-in-service date to January 1, 2010,
is provided for certain property with a recovery period of 10
years or longer, as well as certain transportation property, if
the property has an estimated production period exceeding one
year and costs more than $1 million. Only the portion of the basis
that is properly attributable to the cost incurred before January
1, 2009, is eligible for the additional first-year depreciation.
Eligible transportation property is tangible personal property
used in a trade or business of transporting persons, including
may elect out of the additional first-year depreciation on a class-by-class
basis for property placed in service within the tax year. Taxpayers
should consider electing out of the additional first-year depreciation
and forgoing expensing property under IRC section 179 if they
have net operating losses (NOL) that are about to expire, where
the additional deduction would limit or eliminate the benefits
of the itemized deductions or the standard deduction and personal
exemptions, or if the taxpayer anticipates being in a higher tax
bracket during the depreciable life of the property. Any class
where the taxpayer has elected out of additional first-year depreciation
may affect the taxpayer’s AMT.
year depreciation cap on automobiles raised by $8,000.
The Economic Stimulus Act increases the limitation on the allowable
depreciation on passenger automobiles under IRC section 280F by
$8,000 in the first year, unless the taxpayer elects out. The
IRS has yet to issue the inflation-adjusted caps for section 280F.
The 2007 cap for passenger cars was $3,060; for light trucks and
vans it was $3,260. If there is no 2008 inflation adjustment,
the section 280F maximum depreciation for passenger cars would
be $11,060; for light trucks and vans it would be $11,260. Under
current law, the passenger automobiles, light trucks, and vans
must be used at least half of the time for a trade or business
to qualify for additional first-year depreciation, and the total
depreciation must be reduced proportionately for the percentage
of business use.
their rebate under the Economic Stimulus Act, taxpayers need only
file a 2007 return (some taxpayers might need to file an amended
return to report nontaxable income, such as Social Security benefits).
Eligible individuals receive a basic credit equal to the greater
of the following:
- Net income
tax liability not to exceed $600 ($1,200 in case of a joint
return). Net income tax liability as determined for the credit
is not reduced by the credits added by this act or any credit
that is refundable under present law.
- $300 ($600
in case of a joint return) if—
eligible individual has qualifying income of at least $3,000;
eligible individual has a net income tax liability of at
least $1 and had gross income greater than the sum of the
applicable basic standard deduction amount and one personal
exemption (two personal exemptions for a joint return).
who are eligible for the basic credit may also be eligible for
the $300 child credit for each child under 17 years of age who
lives with the taxpayer and is eligible for the child tax credit.
For children born or adopted in 2008, taxpayers can claim the
credit on their 2008 tax return.
income is the sum of the eligible individual’s earned income,
Social Security benefits, and veteran’s benefit payments.
An eligible individual is any individual other than a nonresident
alien, an estate or trust, or a dependent.
of credit is phased out at a rate of 5% of AGI above $75,000 ($150,000
in the case of joint returns). The IRS began issuing rebate checks
on April 28, 2008.
to Evaluate Benefits
this is one of the shortest and fastest tax bills passed by Congress,
and has very limited changes to the existing tax laws, it provides
an opportunity for taxpayers to evaluate how they can benefit
under the increased expensing provisions. There may even be opportunities
to accelerate 2009 planned purchases during the latter part of
F. Hopson, JD, CPA, is the chair of the school of accountancy
at the University of Central Missouri, Warrensburg, Mo.