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An Appreciation for Depreciation

New Depreciation Rules are Part of the Economic Stimulus Act of 2008

Earlier this year, the “Economic Stimulus Act of 2008” was passed in an effort to jumpstart the economy. In addition to the stimulus tax rebates for individuals and families, the new law includes a couple of business incentives that we want to make sure you know about, especially since they only apply to 2008.

Higher expensing of business personal property purchases.

Under the old law, businesses would have been able to deduct up to $128,000 of the cost of depreciable tangible personal property used in a business in 2008. This was an immediate deduction subject to certain limits based on overall property purchases, and other rules for “qualifying property”. The new law provides for a 2008 deduction (commonly referred to as the Section 179 expense election) of up to $250,000 for property purchased and placed in service during 2008. The limit on the amount of purchases increases to $800,000 (up from $510,000) over which the expense election phases out dollar for dollar. To qualify for this immediate deduction, the property must be actively used in the business, be property eligible for depreciation, and be newly purchased. The business, generally, must also show a profit or the property expense will carry over to the next year.

Additional “bonus” depreciation deductions allowed.

For 2008, new property purchased that is eligible to be depreciated over a period of 20 years or less and certain leasehold improvements are eligible for higher “bonus” depreciation. The new law provides for an additional 50% first-year bonus depreciation deduction on qualifying property. This is in addition to regular depreciation that is allowed and would apply over and above the enhanced expensing election discussed above. An added benefit of the higher depreciation is that the bonus amount can also be claimed for alternative minimum tax (“AMT”) purposes, which may help many of you minimize this additional tax.

An example: During June 2008, a profitable business bought and placed in service $500,000 of five-year property (computers and related items). They had no other purchases during the year. The deduction allowed in 2008 for federal tax purposes is $400,000 ($250,000 expense election, $125,000 bonus depreciation, and $25,000 regular depreciation on the balance). In 2009, the same purchases would only result in approximately $205,000 of a current federal tax deduction.

As with all tax rules, there are a variety of specific rules and exceptions so be sure to check with us at SPS regarding your particular situation before completing a transaction in this area. Note also that all of these incentives and tax changes are for federal tax purposes only as the State of California has not adopted them, resulting in many differences between federal and California tax computations and planning.

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