A Tax Fact from The Tax Institute at H&R Block

It wasn’t just for individuals
In addition to providing tax rebate payments to individuals, the Economic Stimulus Act of 2008 provided enhanced expensing and bonus depreciation provisions for businesses buying assets, such as equipment, tractors, computers, etc., and placing the assets into service in 2008. Specifically, the Act increased section 179 depreciation limits AND added 50 percent bonus depreciation for assets placed into service in 2008.

Enhanced business expensing – section 179 deduction
In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers may elect to write-off the cost of these expenses in the year they are placed in service instead of recovering these costs over time through depreciation. This is frequently referred to as the section 179 deduction, after the relevant section in the Internal Revenue Code.

For tax year 2008, the maximum section 179 deduction is increased to $250,000. The deduction starts to be phased out (or reduced) if the cost of all section 179 property placed in service by the taxpayer exceeds $800,000. Without the new provisions, the 2008 amounts would have been $128,000 and $510,000 respectively. The amount of the deduction in the current year is also limited to the taxpayer’s active trade or business income for the year, but the taxpayer can carry forward any amounts that were not able to be deducted because of this income limitation.

The new law does NOT alter the section 179 limitation imposed on sports utility vehicles, which have a section 179 expense limit of $25,000.

50 percent special depreciation allowance
Depreciation is an income tax deduction that allows a taxpayer to recover the cost of property over a predetermined period of years.

The Economic Stimulus Act of 2008 allows a trade or business to write off 50 percent of the cost of qualifying assets in 2008 in addition to the regular depreciation allowance, IF the assets were acquired and placed into service in 2008.

Qualifying property is generally defined the same as under earlier bonus depreciation provisions. It must satisfy four requirements:

Type of property. The property must be certain property with a recovery period of 20 years or less, water utility property, computer software, or qualified leasehold improvement property. This includes computers, other office equipment, machinery, and furniture.

Original use. The original use of the property must begin with the taxpayer after Dec. 31, 2007. “Original use” means that the property must be new property rather than “used” property when it was first placed into service by the taxpayer.

Acquisition. Generally, the property must have been acquired by the taxpayer after Dec. 31, 2007 and before Jan. 1, 2009. No written, binding contract to acquire the property could be in effect for the asset before Jan. 1, 2008.

Placed in service. The property must have been placed in service by the taxpayer before Jan. 1, 2009. There are exceptions for certain long production and aircraft property.

There is no limit on the amount of property that can qualify for the 50% special depreciation allowance.

New depreciation limits on business vehicles
Generally, the depreciation deduction a business can take for a passenger vehicle placed into service in 2008 is $2,960. However, if the bonus depreciation requirements were met, the deduction is increased up to an additional $8,000 for a maximum depreciation deduction of $10,960 for 2008.

This Tax Fact is brought to you by The Tax Institute at H&R Block.

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As always . . . everyone’s tax situation is different, so be sure to consult a tax professional or financial advisor before making important financial decisions.

This Tax Fact is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice, nor is it intended to be used to avoid IRS penalties.