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Economic Stimulus Package Allows Bonus Depreciation for Projects Completed in 2008

The Economic Stimulus Act signed by President Bush on February 13, 2008 helps businesses in two ways. It gives companies a 50% bonus deduction on shorter life property placed in service in 2008. And it increases - to $250,000 from $128,000 in 2008 - the section 179 limit on expenses that small businesses can deduct from annual income, with a total cap of $800,000.

Bonus depreciation allows taxpayers to take a deduction of 50% of all property placed in service with a class life of 20-years or less. The remaining basis for the shorter life property gets depreciated over the applicable MACRS recovery period. For every $1 million of 5-year property, the deduction will be approximately $600,000 in the first year.

Bonus Depreciation Qualifications:

To qualify for bonus depreciation in the first year, several criteria must first be met:

  • Depreciable property will qualify if the original use of the property commences with the taxpayer after December 31, 2007 and before January 1, 2009 but only if no written binding contract for the acquisition of the property was in effect before December 31, 2007.
  • Qualifying property is MACRS property that has a recovery period of twenty years or less.
  • It may not be property that is required to be depreciated under the alternative depreciation system of section 168.

Information from IRS website:

2008 Economic Stimulus Act Provides Tax Benefits to Businesses

IR-2008-22, Feb. 21, 2008

WASHINGTON — In addition to providing stimulus payments to individuals, the Economic Stimulus Act of 2008 provides incentives to businesses. These incentives include a special 50-percent depreciation allowance for 2008 purchases and an increase in the small business expensing limitation for tax years beginning in 2008.

50-Percent Special Depreciation Allowance

Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property over several years. It is an annual allowance for the wear and tear, deterioration or obsolescence of the property. Under the new law, a taxpayer is entitled to depreciate 50 percent of the adjusted basis of certain qualified property during the year that the property is placed in service. This is similar to the special depreciation allowance was previously available for certain property placed in service generally before Jan. 1, 2005, often referred to as "bonus depreciation." To qualify for the 50 percent special depreciation allowance under the new law, the property must be placed in service after Dec. 31, 2007, but generally before Jan. 1, 2009.

To reflect the new 50-percent special depreciation allowance, the IRS developed a new version of the depreciation and amortization form for fiscal year filers. The new form is designated as the 2007 Form 4562-FY and is available here.

New Depreciation Limits on Business Vehicles

The total depreciation deduction, including the section 179 deduction, a business can take for a passenger automobile, which is not a truck or van, used in the business and first placed in service in 2008 is $2,960 — $10,960 for automobiles for which the special depreciation allowance applies. The maximum deduction that can be taken for a truck or van used in a business and first placed in service 2008 is $3,160 — $11,160 for trucks or vans for which the special depreciation allowance applies.

Section 179 Expensing

In general, a qualifying taxpayer can elect to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as section 179 property, after the relevant section in the Internal Revenue Code.

Under the new law, a qualifying business can expense up to $250,000 of section 179 property purchased by the taxpayer in a tax year beginning in 2008. Absent this legislation, the 2008 expensing limit for section 179 property would have been $128,000. The $250,000 amount provided under the new law is reduced if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $800,000.

The new law does not alter the section 179 limitation imposed on sport utility vehicles, which have an expense limit of $25,000.

PLEASE CONSULT YOUR TAX/FINANCE DEPARTMENT OR ADVISOR TO DETERMINE ACTUAL TAX BENEFITS.

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