Highlights of the Economic Stimulus Act of 2008

By William Green, CPA

 

Intended to provide an expedited economic stimulus to the economy, on February 13, 2008, the President signed the Economic Stimulus Act of 2008 (the “Act”). While the receipt by eligible individuals in 2008 of a rebate check as described below has drawn most of the attention, here are the highlights of the benefits provided by the Act:

 

A business that places depreciable tangible personal property in service in a taxable year beginning in 2008, including off the shelf computer software, used in the active conduct of a trade or business, may elect under Section 179 of the Internal Revenue Code to deduct up to $250,000 (increased from $128,000) of the cost of such property. The $250,000 maximum amount that may be expensed is reduced dollar for dollar if qualifying property in excess of $800,000 (increased from $510,000) is placed in service in a taxable year beginning in 2008. For taxable years beginning in 2009 and thereafter, the prior limitation amounts under Sec. 179 continue to apply. 

 

For both the regular tax and the alternative minimum tax, the first year depreciation deduction otherwise allowed on certain qualified tangible personal property acquired and placed in service during 2008 is increased by 50 percent of the cost of such property.

 

The deductions provided by the asset expense election and bonus depreciation are illustrated by the following example:

 

Corporation X purchases and places in service machinery (5 year property) in its calendar 2008 tax year having a cost of $650,000, which will be subject to the half year convention. Corporation X will elect to expense $250,000 under Sec. 179, leaving the machinery with a remaining depreciable basis of $400,000. Applying the bonus depreciation provided by the Act, Corporation X is entitled to a further deduction in 2008 of $200,000 (50% of $400,000), leaving the machinery with a remaining depreciable basis of $200,000. Standard first year depreciation for 5 year property under the half year convention is 20%, providing Corporation X with further depreciation on the machinery of $40,000. Accordingly, Corporation X is entitled to a total expense and depreciation deduction of $490,000 in 2008 on its $650,000 machinery. The remaining $160,000 cost of the property is recovered after 2008 under otherwise applicable rules for computing depreciation.

 

Generally, individuals will receive in 2008 a tax rebate of up to $600 ($1,200 in the case of a joint return), determined by their net income tax liability for 2007, in the form of a check from the Treasury Department (or by direct deposit). In addition to these amounts, individuals will receive $300 for each child under the age of 17. However, the amount of these rebates will be reduced by 5 percent of the amount that the individual's 2007 adjusted gross income exceeds $75,000 ($150,000 in the case of a joint return). Individuals entitled to a rebate check will receive their rebate check in 2008 after they file their 2007 tax return.

 

The Act also contains provisions to help boost the housing market.  The Act temporarily increases the limit on Federal Housing Administration loans to more than $700,000 and temporarily increases the cap on loans that Fannie Mae and Freddie Mac may buy to $729,750.

 

 

Material discussed is meant to provide general information and should not be acted on without obtaining professional advice appropriately tailored to your individual needs.  To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties under the Internal Revenue Code or applicable state or local tax law provisions or (ii) promoting, marketing or recommending to another party any tax related matters addressed herein.