What does the Economic Stimulus Act of 2008 mean for your property?

In February 2008, The Economic Stimulus Act of 2008 was signed into law. Its aim was to help stall a recession and encourage new business investment.

Under this act, the accelerated depreciation provisions of IRC §168 were amended, allowing increased first-year depreciation deductions for qualifying property placed into service during 2008, as well as additional §179 deductions.

An additional first-year depreciation deduction equal to 50 percent of the depreciable basis of the property is allowed for both regular and alternative minimum tax purposes. This deduction is generally determined without any proration for the amount of time during the year in which the property is in service. To be eligible, the property must be qualified property placed into service during 2008. The depreciable basis of the property must be adjusted by the amount that is claimed as a bonus depreciation deduction.

Bonus depreciation isn’t available for assets required to be depreciated under §168(g), the Alternative Depreciation System or qualified New York Liberty Zone Leasehold Improvement Property. There is a special provision for certain long-lived assets, which if placed in service prior to December 31, 2009, will still qualify.

To be considered qualified property, it must be property to which general Modified Accelerated Cost Recovery System rules apply, with a recovery period of 20 years or less. Most tangible personal property will meet this test; however, most real estate assets will fail to meet this definition, and thus, will not be eligible for the additional deduction. The original use of the property must have begun with the taxpayer after December 31, 2007. The taxpayer must have acquired the property and placed it into service after December 31, 2007 but before January 1, 2009. Finally, if a binding contract to acquire this property existed before January 1, 2008, the property will not qualify for the bonus depreciation provisions.

The additional first-year bonus depreciation deduction is also available for the cost of qualified leasehold improvement property if it meets all of the following tests:

• The improvement must be made to the interior portion of the building and the building must be non-residential real property.
• The improvement must be made pursuant to or under a lease either by the lessee or sub-lessee or the lessor to property that will be occupied exclusively by the lessee or sub-lessee. 
• The improvement must be placed in service more than three years after the date the building was first placed in service.

Like prior years, a taxpayer may elect out of taking bonus depreciation. In order to elect out of these provisions, the election must be made by the due date—including extensions—of the tax return for the year the property was placed in service.

The provisions of §179 were also amended under the Economic Stimulus Act of 2008. The §179 election allows taxpayers who are in a trade or business to expense tangible personal property immediately, rather than depreciate it over its useful life, thus accelerating the deduction to the current year. This new provision allows for a §179 deduction of $250,000 during 2008, a 95-percent increase from the previous limitation of $128,000.

The Economic Stimulus Act also increases the §179 phase-out limitation for property placed in service, from $510,000 to an increased 2008 limit of $800,000. The expense amount is reduced dollar for dollar once the threshold is reached; therefore, any taxpayers placing into service more than $1,050,000 worth of property during 2008 would have their section §179 expense reduced to zero. The §179 expense can’t create or add to a taxable loss, so there will be no current-year benefit unless there is sufficient taxable income. A business that can’t use the full amount of its §179 deduction in the current year may carry the expense forward to offset taxable income in the following years. A qualified asset may be eligible for both the §179 deduction and the bonus depreciation provisions.

The Economic Stimulus Act also allows additional 2008 depreciation for passenger automobiles, as well as for trucks and vans used in a business. For vehicles to which the 50-percent bonus depreciation doesn’t apply, the 2008 depreciation limits are $2,960 for cars and $3,160 for trucks—those limits are increased to $10,960 and $11,160 respectively. These limits are reduced if the business use of the vehicle is less than 100 percent. In addition to these increased limits, the automobile lease inclusion tables have also been updated. iBi