Hefty Tax Breaks Designed to Spur Business Spending

Congress is betting that some juicy tax incentives will get firms to open their wallets wider.

By Joan Pryde, Senior Tax Editor, the Kiplinger letters

May 14, 2008

Businesses are big winners in the economic stimulus package signed into law earlier this year. They may not be getting rebate checks, but they are getting showered with $45 billion in tax breaks designed to spur them on to purchase more equipment, cars and other assets sooner rather than later.

Congress boosted the limit on first-year expensing of assets -- the so-called Section 179 deduction -- to $250,000 for 2008. That's up from $128,000 under previous law and means a business can instantly write off up to a quarter of a million dollars' worth of expenses that otherwise would be deducted over a number of years.

Expensing is now available to bigger firms, too. The opportunity to "expense" costs gradually disappears as companies spend "too much" on qualifying equipment. Under previous law, the expensing allowance was reduced by $1 for each $1 of investment over $510,000. Now the squeeze does not begin to apply until qualifying investments pass the $800,000 mark. To be eligible for expensing, assets must be tangible personal property and used in a trade or business, and the deduction can't be more than the firm's earned income for the year.

Companies also get 50% bonus depreciation on assets put in use in 2008. That is, they get an extra write-off equal to half of the asset's cost. The balance of the cost is recovered by normal depreciation. Businesses eligible for the Section 179 deduction claim that write-off first and then use the 50% bonus.

Consider this example: In 2008, Company A puts $500,000 of qualifying equipment into service. A five-year depreciation schedule would allow a $100,000 deduction in 2008. But under the new law, the firm could write off $400,000 -- $250,000, thanks to expensing, another $125,000 (50% of the remaining cost) for bonus depreciation, plus $25,000 (first-year depreciation of the remaining $125,000 of cost). A couple of caveats: Only new assets are eligible for bonus depreciation: If the item was used, even for a short time, by another firm before you place it in service in 2008, it won't qualify. Plus assets covered by a binding written contract that was in effect before Jan. 1, 2008, are ineligible for bonus depreciation, even if they aren't put in use until this year.

Relief under this provision is rather broad: Assets that normally are depreciated over 20 years or less are eligible for the 50% bonus. That includes machinery, equipment, land improvements and farm buildings, even leasehold improvements made to the interior of commercial realty. Also eligible are water utility property and purchases of computer software. Autos and light trucks qualify for bonus depreciation if they're put in service in 2008. The maximum first-year write-off for them is increased to around $11,000.

Fiscal-year firms need to pay close attention to the effective dates of both breaks in the stimulus package. On first-year expensing, the higher limit applies to the firm's tax year that starts in 2008. So a company with a fiscal year that runs from July to June can take the heftier write-off only on assets put in use after June 30, 2008. For purchases before July, the old $128,000 limit applies. Bonus depreciation, meanwhile, covers only assets put in use in 2008. So an asset won't qualify if it's placed in service in the 2007 portion of a firm's 2007-2008 fiscal year.

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