Economic Stimulus Act of 2008
Analysis of Major Provisions

By James F. Hopson

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Business Incentives

IRC 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.

To illustrate 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.

In addition 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.

Before investing 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 personal exemptions.

Additional 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.

Special rules 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.

The deduction 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.

To illustrate, 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.

Qualified property is defined as follows:

• Property to which MACRS applies, with an applicable recovery period of 20 years or less;
• Water utility property defined in IRC section 168(e)(5);
• Computer 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
• Qualified 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).

In addition, 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 certain aircraft.

A taxpayer 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.

First 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.

Individual Tax Rebates

To receive 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—
  • the eligible individual has qualifying income of at least $3,000; or
  • the 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).

Individuals 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.

Qualifying 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.

The amount 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.

Opportunity to Evaluate Benefits

Although 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 2008.

©2009 The New York State Society of CPAs. Legal Notices