On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008 into law.  The goal of the Act is to inject cash into the economy in an effort to stave off a recession.

Quite a bit of the media focus has been on the issuance of tax rebate checks to eligible taxpayers.  Hopefully, once the rebate checks start to arrive, our small businesses will begin to see the benefits expected to flow from this rebate program.  However, a frequently overlooked aspect of the Economic Stimulus Act of 2008 is the accelerated depreciation available to business owners for qualified business property placed in service in 2008.

Under customary tax rules, when a business buys an asset that is expected to last a number of years, the cost of that asset is deducted over a period of time that is meant to mirror the life of the asset.  The cost of the asset is deducted through depreciation expense reducing net income before income taxes, reducing income taxes payable and increasing the cash available to the business since depreciation is a non-cash expense.

The Economic Stimulus Act of 2008 allows businesses to accelerate the depreciation of assets resulting in an increased depreciation expense and reduced income tax expense.  The goal is to encourage businesses to acquire equipment and thereby spur economic activity. 

Section 179 of the Internal Revenue Code allows a business taxpayer to accelerate the depreciation of a limited amount of long lived assets in one year.  For 2007, the maximum amount of assets that could be handled in this manner was a total of $125,000, and businesses that purchased more than $500,000 of assets in a given year began to lose the ability to make use of this deduction. 

The Economic Stimulus Act of 2008 raises both the amount of assets that can be written off in one year to $250,000 and the threshold at which the ability to utilize this deduction begins to phase out to $800,000.  This provision is effective for tax years beginning in 2008.

In addition to the changes in the Section 179 deduction, the Act provides for a “Depreciation Bonus.”   Businesses that buy new equipment in 2008 can depreciate 50% of the cost in the first year plus the percentage of the remaining basis in the equipment that would ordinarily be depreciated under the Modified Accelerated Cost Recovery System (MACRS).  For a $100,000 piece of equipment with a five-year MACRS life, the first year depreciation under the Depreciation Bonus Provision of the Economic Stimulus Act of 2008 would be $60,000 -- $50,000 Depreciation Bonus, plus $10,000 representing 20% of the remaining $50,000 in basis.  In certain cases, leased equipment can also qualify for the Depreciation Bonus. 

In order to be eligible for the Depreciation Bonus the following requirements must be satisfied:

• The equipment must be depreciable under MACRS and have a depreciation recovery period of 20 years or less.

• The original use of the equipment must commence with the taxpayer (i.e., the equipment must be new not used) claiming the Depreciation Bonus after December 31, 2007.  In limited cases, if the business purchases equipment that it has been leasing it may qualify for the Depreciation Bonus.

• The equipment must be purchased in 2008.  Equipment for which a binding purchase contract was in effect before January 1, 2008 is not eligible.

• The equipment must be placed in service in 2008.

The Section 179 deduction and the Depreciation Bonus may by combined for eligible companies for bigger tax savings. 

If you have business customers who are considering purchasing equipment, now may be the time to move forward to allow them to get the maximum benefit from the Economic Stimulus Act of 2008.

NYBDC and Empire State CDC: The 504 Company are available as lending partners to make the transactions work.  Both the SBA 7(a) and the 504 loan programs provide for equipment acquisitions as a permissible use of loan funds.  NYBDC can support your small business lending programs with our SBA expertise and loan participations at fixed or variable rates.   You can also add value to your relationship with your customer by including the Linked Deposit, NYSERDA and/or Manufacturers Assistance Program in the financing package.

The foregoing is general tax information that may or may not be applicable to specific circumstances.  Please see your tax advisor in order to see how these provisions may apply to you.

Kevin Tully, partner at Teal, Becker & Chiaramonte, CPAs, P.C., has worked there for 25 years and is directly accountable for managing the firm’s tax department.  His responsibilities include applying management advisory and tax services to every aspect of the firm’s practice.  He is a member of the American Society of Certified Public Accountants and the New York State Society of CPAs.  He is licensed in the states of Massachusetts, Alabama, Connecticut and New York.  Kevin currently serves on the boards of the Albany Rotary Foundation, the Children’s Museum at Saratoga, the Fast Break Fund and the Living Resources Certified Home Health Agency.

Kevin received his Bachelor of Business Administration degree in Accounting from Siena College and his MBA from the State University of New York at Albany.