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Introduction |
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On February 13, 2008, President Bush signed into law the highly publicized and long awaited Economic Stimulus Act of 2008 (the "Act"). The purpose of this Act is to boost the economy by providing tax rebates to individuals and incentives for business investment. To this end, this Act contains provisions that apply to both businesses and individual taxpayers. |
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Business Provisions |
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The Act provides for increased expensing and depreciation deductions, for both regular and Alternative Minimum Tax purposes, as follows:
Increased Section 179 Expense
In general, Section 179 of the Internal Revenue Code allows businesses a current year tax deduction for their capital purchases, such as machinery, furniture, and fixtures, subject to limitations. This deduction is commonly known as Section 179 expense.
Pursuant to prior law, for 2008, the maximum Section 179 expense deduction was $128,000, which was phased out, or reduced, by one dollar ($1) for every dollar that the cost of qualifying property placed in service exceeded $510,000. For example, if a taxpayer placed in service $511,000 of assets during 2008, then its Section 179 deduction would have been $127,000 (i.e., the $128,000 maximum deduction less the $1,000 excess over $510,000 ($511,000 - $510,000)).
Pursuant to the Act, the maximum Section 179 deduction increases to $250,000, and this deduction will not be phased out until a taxpayer places in service at least $800,000 of assets. Please note that the enhanced benefits of Section 179 that are applicable to empowerment zones, renewal community property, Gulf Opportunity Zones, and Enterprise zones are in addition to the enhanced expense provisions of the Economic Stimulus Act.
As a caveat, under both prior law and the Act, the Section 179 expense is limited to taxable income. For example, if taxable income before the Section 179 deduction is $100,000, then the Section 179 deduction would also be limited to $100,000. In general, the Section 179 expense not used in the current year can be used in subsequent years.
Bonus Depreciation
The Act provides for bonus depreciation of fifty percent (50%) of the cost of new qualifying property acquired and placed in service during 2008. Qualifying property includes machinery, equipment, furniture, fixtures, and certain leasehold improvements, but does not include passenger automobiles. Unlike the Section 179 expense deduction, a taxpayer can take a full bonus depreciation deduction without being subject to taxable income limitations.
Passenger Automobiles
Under prior law and the Act, notwithstanding the Section 179 expense provision, first year depreciation for passenger automobiles was limited. For 2007, the limitation is $3,060, and for 2008, the Internal Revenue Service will adjust this amount according to the consumer price index. Under the Act, this limitation is increased by $8,000 for 2008. This deduction is not increased by the bonus depreciation deduction.
Example
Let's assume that, on January 1, 2008, a business acquires, and places in service, a qualifying asset for $100,000, and does not elect to take a Section 179 expense deduction. Depending on the class life of the property acquired, 2008 allowable depreciation is as follows:
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Depreciable Life |
Depreciation Amount* |
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3 years |
$66,667 |
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5 years |
$60,000 |
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7 years |
$57,145 |
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10 years |
$55,000 |
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15 years |
$52,500 |
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20 years |
$51,875 |
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Passenger automobile |
$11,060 (approximate) |
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Qualified truck or van |
$11,260 (approximate) |
*Subject to averaging conventions
State tax implications
As of now, twenty-three (23) states will allow the depreciation deduction computed pursuant to the Act, while the remaining states, such as New Jersey, will limit the depreciation deduction, or "decouple" from the Act. However, we expect that some of these twenty-three (23) states will also decouple from the Act. We will apprise you of any state law developments in this area. |
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Individual Provisions |
Tax Rebates
In general, taxpayers are entitled to rebates of either $1,200, if they file a joint return, or $600 if they do not. In addition, taxpayers who claim children as dependents on their tax returns are also entitled to additional rebates of $300 per child younger than seventeen (17) years old. Congress' goal is to have a rebate check issued from six to eight weeks after the taxpayer files his or her return. Please note that if a taxpayer elects to have his or her 2007 refund directly deposited into a bank account, then the rebate will also be directly deposited.
The rebates are subject to income limitations. The entire rebate is phased out, or reduced, by five percent (5%) of adjusted gross income ("AGI") that exceeds either $150,000 for joint return filers, or $75,000 for all other filers. For married taxpayers who are eligible for a $1,200 rebate, the rebate will be complete phased out if AGI is at least $174,000. For all other taxpayers who are eligible for the $600 rebate, the rebate will be completely phased out if AGI is at least $87,000. In addition, the rebate cannot exceed a taxpayer's 2007 tax liability.
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Conclusion |
Please contact either your Sax Macy Fromm & Co., P.C. advisor or Michele Brandao at 973-472-6250 to determine how the Act affects you and your business.
IRS regulations require us to advise you that the federal tax advice in this communication was not intended or written to be used, and it cannot be used, by any taxpayer in order to avoid penalties. Furthermore, this communication was not intended or written to support the promotion or marketing of any of the transactions or matters it addresses.
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