The Economic Stimulus Act of 2008 (“Act”) makes the following significant changes to the federal tax code: 1) eligible individuals will receive tax rebate checks; 2) the Section 179 expense limit is increased to $250,000; and 3) businesses may receive a 50% bonus first-year depreciation deduction for assets purchased in 2008.
1. Individual Tax Rebates
Basic rebate. An eligible individual will receive a 2008 tax credit equal to the greater of (1) the taxpayer’s net income tax liability up to a maximum of $600 ($1,200 for a joint return) or (2) $300 ($600 for a joint return) if either (a) the taxpayer’s “qualifying income” is at least $3,000 or (b) the taxpayer pays at least $1 in income tax and the taxpayer’s gross income is greater than $8,950 ($17,900 for a joint return). “Qualifying income” includes earned income, Social Security benefits, and veterans’ disability payments. Most taxpayers will receive the credit as a rebate check.
Rebate for qualifying children. An eligible taxpayer will also receive an additional $300 credit for each qualifying child. To be a qualifying child, the child must live in the taxpayer’s place of abode for more than one-half of the tax year, be under age 17, and satisfy a relationship test (such as a child or grandchild).
Phase out. The amount of the rebate (including the rebate for qualifying children) is reduced by 5% of the taxpayer’s adjusted gross income (“AGI”) above $75,000 ($150,000 for joint returns).
Example. A married couple filing jointly has two children and AGI of $160,000. They should receive a rebate of $1,300, calculated as follows: $1,800 gross credit ($1,200 basic credit plus $300 per child) minus $500 (5% of $10,000: the excess of $160,000 over $150,000).
2. Section 179 Expensing
Under Section 179, a taxpayer can elect to expense (rather than depreciate) the cost of certain tangible personal property used in the taxpayer’s business. Before the Act, a taxpayer’s 2008 Section 179 expense was capped at $128,000, and was reduced dollar-for-dollar by the amount by which the taxpayer’s new property exceeded $510,000.
To encourage economic expansion, the Act increases the 2008 Section 179 expensing limit to $250,000, which is not reduced until the taxpayer purchases more than $800,000 of new property.
3. Bonus First-Year Depreciation
For “qualified property” placed in service during 2008, the Act also allows taxpayers to claim an additional, one-time depreciation deduction equal to 50% of the property’s adjusted basis. “Qualified property” includes most types of new property other than buildings.
Example. On April 1, 2008, ABC, Inc. purchases and places in service $800,000 of qualified property (which is normally depreciated over 5 years). The Act will allow ABC to claim a depreciation expense of $480,000 on its 2008 tax return, computed as follows: $400,000 bonus depreciation ($800,000 * .5 = $400,000) + $80,000 MACRS depreciation «$800,000 – $400,000) * .2 = $80,000).
If a taxpayer also expenses a portion of the property cost under Section 179, then the taxpayer may deduct over 70% of the property cost during 2008.
Example. Same facts as above except that ABC is eligible and elects to expense $250,000 of the property’s cost under Section 179. Thus, ABC may expense $580,000 in 2008, computed as follows: $250,000 Section 179 expense + $275,000 bonus depreciation «$800,000 – $250,000) * .5 = $275,000) + $55,000 MACRS depreciation «800,000¬250,000-275,000) * .2 = $55,000).
The Act contains certain exceptions to the rules discussed above, so you should visit with your tax advisor or a member of the McGrath North Tax Group to determine the effect of the Act on your particular situation.