The Economic Stimulus Act of 2008 (“the Stimulus Act”) establishes a temporary 50% first-year deduction. Under this beneficial provision, taxpayers can claim a first-year depreciation write-off equal to 50% of a qualified asset’s cost.  

In addition, IRC Sec. 179 allows eligible taxpayers to expense (immediately deduct) the cost of depreciable personal property (including software) used for business. For tax years beginning in 2008, the maximum Section 179 allowance is a generous $250,000. (Next year, the maximum Section 179 write-off will drop back to $125,000, adjusted for inflation)

Basic Eligibility Rules for Bonus Depreciation

To be eligible for 50% first-year bonus depreciation, an asset must pass all three of the following tests.

  1. It must be “qualified property.”
  2. The original use of the asset must commence with the taxpayer after 12/31/07.
  3. It must be acquired after 12/31/07 and by no later than 12/31/08.

In general, the asset must be placed in service by no later than 12/31/08. However, an extended placed-in-service deadline of 12/31/09 applies to certain longer-lived assets.

What Is Qualified Property?

To be qualified property, the asset must fit within one of the following definitions.

  1. Eligible Section 168 recovery property with an MACRS recovery period of 20 years or less. This definition covers most personal property like machinery, equipment, computers, and automobiles (subject to certain rules)  Most real estate assets will fail to meet the definition (see certain leasehold improvements below).
  2. Depreciable computer software:  Most purchased software is depreciable using the straight-line method over 36 months is thus eligible for bonus depreciation.
  3. Qualified leasehold improvement property.

Certain Leasehold Improvement Costs Qualify

The 50% first-year bonus depreciation break is available for the cost of “qualified leasehold improvement property.” To meet this definition, all of the following tests must be passed:

  1. The improvement must be to the interior portion of a building.
  2. The building must be nonresidential real property (commercial).
  3.  The improvement must be made pursuant to or under a lease by either the lessee (or sublessee) or the lessor to property that will be occupied exclusively by the lessee (or sublessee).
  4. The improvement must be placed in service more than three years after the date the building was first placed in service.

 Certain improvements are ineligible by definition. These include the following:

  1. Expenditures to enlarge a building.
  2. Costs for any elevator or escalator, any structural component benefiting a common area, and any internal structural framework of a building.
  3. Improvements made pursuant to leases between certain related parties. 
Hint: While the 50% deduction for leasehold improvements can generate a huge 2008 write-off,  the passive activity loss limits still apply so careful planning is necessary to insure taxpayers maximize benefits.
 
Acquisition Date Must Be within Applicable Period
 
To be eligible for bonus depreciation, an asset must be acquired after 12/31/07 (with no written binding contract for acquisition in effect before 1/1/08). The asset must also be acquired by no later than 12/31/08.
 
Impact of Bonus Depreciation on New Passenger Autos and Light Trucks
 
For a new passenger auto used over 50% for business and subject to the unfavorable luxury  auto depreciation limitations, bonus depreciation increases the maximum first-year depreciation deduction by a healthy $8,000.   For new passenger autos acquired and placed in service in 2008, the maximum first-year depreciation deduction is now $10,960 ($2,960 + $8,000). For new light trucks acquired and placed in service in 2008, the maximum first-year depreciation deduction is now $11,160 ($3,160 + $8,000).  Of course, the full amount is only available when the passenger auto or light truck is used 100% for business. For instance, say a light truck is used 80% for business. The maximum first-year depreciation deduction would be only $8,928 (.80 × $11,160).
 
Impact of Bonus Depreciation on New Heavy SUVs
 
The maximum Section 179 deduction for heavy SUVs is limited to $25,000. However, combining the $25,000 Section 179 deduction with the new bonus depreciation break can lead to potent tax-saving results.
 

Please, do not hesitate to contact one of the CPAs in our office to discuss both the business and tax advantages that these new code provisions provide.

David M. Kendrick, CPA

 

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