Business Incentives
Recent Legislation Provides Bonus Depreciation and Enhanced Expensing
by Stuart R. Josephs, CPA
The 2008 Economic Stimulus Act (P.L. 110-185) authorizes an additional depreciation deduction equal to 50 percent of the adjusted basis of “qualified property” that is placed in service after 2007 in tax years ending after 2007. This property must be acquired after 2007 and before 2009. Fiscal year taxpayers can claim this depreciation deduction on new IRS Form 4562-FY.
Qualified Property: Qualified property must meet these requirements:
1. It must be included within one of these categories:
• Property eligible for the modified accelerated cost recovery system with a depreciation recovery period of 20 years or less;
• Water utility property;
• Off-the-shelf computer software (which is not covered by Sec. 197); or
• Qualified leasehold improvement property (discussed below).
2. The property’s original use must commence with the taxpayer after 2007. Original use is the first use to which the property is put, whether or not that use corresponds to the taxpayer’s use of the property. This means that the property must be new property in the taxpayer’s hands.
3. The property generally must be acquired by the taxpayer:
• After 2007 and before 2009, but only if no binding written contract for that acquisition was in effect before 2008; or
• Pursuant to a binding written contract entered into after 2007 and before 2009.
4. The property generally must be placed in service after 2007 and before 2009. A one-year extension of this placed-in-service date (to before 2010) applies to certain property with a recovery period of 10 years or longer and to certain transportation property (tangible personal property used in the trade or business of transporting persons or property). This property must have an estimated production period exceeding one year and cost more than $1 million.
This one-year extension also applies to certain aircraft.
Comments:
• If all of the above requirements are met, bonus depreciation applies automatically to qualified property, unless the taxpayer “elects out” under Sec. 168(k)(2)(D)(iii).
• In IR 2008-58, 4-11-08, the IRS announced that it will soon issue guidance on claiming bonus depreciation. Until then, taxpayers can rely on the previously issued regulations governing prior bonus depreciation.
Qualified Leasehold Improvement Property: This property is any improvement to an interior of a building which is non-residential real property if these conditions are met:
1. The improvement is made under or pursuant to a lease (defined in Sec. 168(h)(7) as any grant of a right to use property) by the building portion’s lessee, sublessee or lessor.
2. This portion is to be occupied exclusively by the lessee or any sublessee of the portion.
3. The improvement is placed in service more than three years after the building was first placed in service by any person.
A binding commitment to enter into a lease is treated as a lease and the parties to commitment are treated as lessor and lessee.
Caution: A lease between related persons is not considered to be a lease. Related persons are:
• Members of an affiliated group (defined in Sec. 1504); and
• Persons having a relationship described in Sec. 267(b), but using “an 80 percent or more” test rather than a “more than 50 percent” test.
Luxury Autos and Other Listed Property Vehicles
The 2008 regular dollar cap for depreciation, including any Sec. 179 expense deduction, on vehicles that are not “qualified property” (described above), placed in service during 2008 is as follows for 100 percent business use:
Passenger automobiles: $2,960
Light trucks or vans: $3,160
These caps also apply if a vehicle is qualified property but an “election out” is made.
If these vehicles are qualified property, and no “election out” is made, these 2008 dollar caps are increased by $8,000 and will be:
Passenger automobiles: $10,960
Light trucks or vans: $11,160
Enhanced Expensing
Under the old law, the maximum Sec. 179 expense deduction for property placed in service in tax years beginning in 2008 was $128,000 (the $125,000 set forth in Sec. 179(b)(1), adjusted for inflation). The 2008 Act increased this maximum to $250,000, but only for property placed in service in tax years beginning in 2008.
Under the old law, the maximum annual expense deduction generally was reduced, dollar-for-dollar, by the cost of Sec. 179 property placed in service in tax years beginning in 2008 that exceeded $510,000 (the $500,000 set forth in Sec. 179(b)(2), adjusted for inflation). The 2008 Act increased this investment limitation to $800,000, but only for property placed in service in tax years beginning in 2008.
Comment: This enhanced Sec. 179 deduction is not reflected on the new Form 4562-FY because the enhancement applies only for property placed in service in tax years beginning in 2008.
Stuart R. Josephs, CPA has a San Diego-based Tax Assistance Practice (TAP) specializing in assisting practitioners in resolving their clients’ tax questions and problems. Josephs, chair of the Federal Subcommittee of CalCPA’s Committee on Taxation, can be reached at (619) 469-6999 or stuartrjosephs@yahoo.com.
