February 8, 2008

To boost a perceived flagging economy, yesterday the Senate adopted the House version of an economic stimulus bill. The President has given every indication that the legislation will be enacted immediately.

The bill provides two broad classes of tax benefits:

• Significant liberalized expensing of business equipment and bonus depreciation

• Tax rebate to individuals
   

Expensing of Business Equipment and Bonus Depreciation

Tax strategy
Suddenly, the timing of purchase of business equipment becomes of paramount importance in the capital expenditure budget of any business. Any long-term plans to purchase equipment after 2008 should possibly be accelerated into 2008. Tax benefits will substantially pay for a part of the equipment.

Increased first-year (section 179) expensing
Under current law, taxpayers can expense up to $128,000 for 2008. This annual expensing limit is reduced by the amount by which the cost of qualifying property placed in service during 2008 exceeds $510,000. The amount of the expensing deduction is limited to the amount of taxable income from any of the taxpayer's active trades or businesses.

For tax years beginning in 2008, the $128,000 expensing limit will be increased to $250,000 and the overall investment limit will be increased from $510,000 to $800,000. Both amounts will be indexed for inflation.

Most small businesses, and even some moderate sized businesses with capital equipment needs, will be able to claim a full deduction for the cost of business machinery and equipment purchased in 2008, thereby reducing their effective cost for the assets. What is more, there is no alternative minimum tax adjustment with respect to property expensed in this manner.

Bonus depreciation making a comeback
Bonus first year depreciation was first allowed following the terrorist attacks of 2001 but generally is not available for property acquired after 2004.

The legislation will permit a bonus first-year depreciation deduction of 50% of the adjusted basis of qualified property placed in service after December 31, 2007, and before January 1, 2009, e.g., during calendar year 2008 regardless of the tax year of the business. The otherwise applicable “luxury vehicle” cap on first year depreciation would be increased by $8,000 for vehicles that qualify.

Bonus depreciation will be elective and will apply for AMT as well as for regular tax purposes.

The bonus depreciation applies to:

• Property which has a depreciable life of 20 years or less under IRS guidelines. This includes most all type business equipment except for real property

• Water utility property

• Computer software other than computer software qualifying for the first-year expensing

• Qualified leasehold improvement property.

As a final note, only new property purchased in 2008, and put in service in 2008 qualifies. Used equipment will not qualify.

Tax Rebates to Individuals

Amount of rebate
The bill provides for a refundable rebate to be paid to taxpayers in 2008 based on the tax reported on their 2007 personal income tax return. The rebate will phase out at higher income levels.

An eligible individual will receive a rebate in 2008 equal to the greater of:

• The 2007 net income tax liability up to a maximum of $600 ($1,200 for a joint return)

• An amount of $300 ($600 for a joint return) if either (a) 2007 earned income is at least $3,000; or (b) 2007 net income tax liability is at least $1 and gross income is greater than the sum of the applicable basic standard deduction amount and one personal exemption (two personal exemptions for a joint return).

There would be an additional $300 per-child credit amount.

The amount of recovery rebate credit (both the basic and the child's amount) would phase out at a rate of 5% of adjusted gross income (AGI) above $75,000 ($150,000 for joint returns).

Illustration:
For 2007, married taxpayers filing jointly have $175,000 adjusted gross income (AGI), two qualifying children, and a net tax liability of $31,189.

The amount of the rebate before the phaseout would be $1,800 [$1,200 (i.e., greater of $600 or net tax liability not to exceed $1,200) + $600 ($300 × 2 children)]. However, the phaseout reduces the $1,800 amount to $550 [$1,800 − $1,250 reduction, i.e., ($175,000 AGI − $150,000) × 5%].

Eligible individuals
An eligible individual would be any individual other than: a nonresident alien; an estate or trust; or a dependent.

Eligible child
For purposes of the additional $300 rebate, an eligible child would be determined under the definition of a qualifying child for the child credit.

Delivery of rebate checks
Most taxpayers will receive the credit in the form of a check issued by the Treasury. It is anticipated that the Treasury will begin issuing the checks in May to individuals who file their 2007 tax returns by April 15, 2008. Taxpayers who file late or pursuant to extensions would receive their payments later. In no event will Treasury issue checks after December 31, 2008.
 

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This alert is not intended or written to be used, and cannot be used by any recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code and is not intended to be used or referred to in any marketing or promotional materials. This disclaimer is made to comply with Circular 230, which governs practice before the Internal Revenue Service. This alert is based on the best information available as of this date. When the legislation is released it could possibly contain differing provisions than we have outlined above.
 

If you have any questions, please call us at 502.585.1600 or email info@strothman.com

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