Economic Stimulus For Businesses

Congress and the president have prescribed powerful medicine to stimulate the U.S. economy.

On Feb. 13, President Bush signed the Economic Stimulus Act (ESA). In addition to providing tax rebate checks to middle-income families and making it easier to refinance mortgages, the ESA temporarily reinstates the depreciation bonus and increases Sec. 179 expensing limits. The goal: encourage business purchasing.

Under the new law, companies that buy equipment (and other eligible property) in 2008 can depreciate an additional 50 percent of the cost in the first year. To be eligible for bonus depreciation, the equipment must be new and placed in service before Jan. 1, 2009. The depreciation bonus is elective (you do not have to use it) and applies for both regular and alternative minimum tax purposes.

The ESA also significantly boosts Sec. 179 expensing limits for 2008. Companies can now expense up to $250,000 as long as total purchases do not exceed $800,000. For each dollar over, the eligible expensing amount correspondingly drops by one dollar. Companies that spend more than $1,050,000 on tangible personal property cannot take advantage of Sec. 179 (but can still use the depreciation bonus). Unlike the depreciation bonus, Sec. 179 expensing can be applied to both new and used equipment. Companies eligible for Sec. 179 can also combine it with the depreciation bonus for even bigger tax savings.

By lowering your taxable income, the depreciation bonus and Sec. 179 can dramatically cut your 2008 tax bill, thereby freeing up cash in the near term. But there is a catch: The more you depreciate now, the less you will be able to depreciate later. In other words, your tax bill in future years will be slightly higher because you will have less to deduct.

If history is any guide, the temporary capital investment incentives will boost equipment purchasing in the months ahead as savvy companies take advantage of the law to buy newer, more efficient, and more environmentally friendly equipment. Check with your tax professional to learn about making Sec. 179 and the depreciation bonus work for you.