Recently, the U.S. Congress and the President passed a bill designed to stimulate consumer spending and ‘jumpstart’ the economy. The bill includes income tax rebates for individuals and tax incentives for businesses.

The publicity about the individual rebates has overshadowed the other parts of the stimulus package. However, the bill also contains tax incentives intended to give small businesses the opportunity to invest in new equipment, create jobs and, like the individual rebates, stimulate economic growth.

The business incentives include: 1. enhanced expensing; 2. temporary bonus depreciation; and increased luxury auto limitations.

The central component of the stimulus package is the “advance credit payments”, or tax rebates to low and middle-income consumers. Ranging from $300 for a person with $3,000 in Social Security benefits, to $1,200 for a married couple earning up to $150,000 filing jointly, plus $300 for each qualifying child, checks are expected to be mailed after the end of the IRS tax season [i.e. beginning in May 2008]. The amount of the rebate is based on a person’s 2007 tax year; therefore, until their 2007 tax return is filed, a rebate check will not be sent. For those who do not file until the October 15, 2008 extension date, their rebate check will not be sent until after that date. No checks will be sent after December 31, 2008.

This bill also includes some assistance by increasing mortgage amounts that certain government agencies are allowed to lend homeowners in refinance situations.

The new law doubles the amount of deductible Code Sec. 179 expensing for 2008 to $250,000 and increases the threshold for reducing the deduction to $800,000. It applies to property purchased and placed in service in tax years beginning in 2008. Unlike the amounts under current law, the amounts in the stimulus package are not indexed for inflation. Before the new law, a business could deduct (“expense”) up to $128,000 of the cost of depreciable tangible personal property used in the active conduct of a trade or business in 2008. If the cost of qualified property placed in service during the year is more than $510,000, the ceiling for that business is reduced by the amount over the applicable limit.

Businesses not on a calendar year should note that the higher expensing limits apply to tax years beginning in 2008. Their higher expensing under the new law does not start until their new fiscal tax year starts.

Taxpayers may recall the bonus depreciation rules that went into effect shortly after September 11, 2001 and remained in place with some modifications until December 31, 2005. The new law essentially restores these rules by providing qualifying taxpayers 50 percent first-year bonus depreciation of the adjusted basis of qualifying property.

The property generally must be purchased and placed in service during 2008. Thus, the original use of the property must begin with the taxpayer and must occur after December 31, 2007, and before January 1, 2009. There cannot be a binding written contract before January 1, 2008, to acquire the property. Property qualifies only if it is acquired under a binding written contract entered into during 2008.

The new law also raises the Code Sec. 280F limitations on “luxury” auto depreciation. Ordinarily, the first-year limit on depreciation for passenger automobiles cannot exceed $2,650. The new law raises the cap once again, this time to $8,000 if bonus depreciation is claimed for a qualifying vehicle. If the vehicle is not predominantly used for business in a subsequent year, then bonus depreciation must be recaptured.

This article is presented for informational purposes only. To learn more about the 2008 Economic Stimulus Package, or any important tax matter, please contact Charles Hahn, Director of Tax Services at chahn@bnncpa.com or call a BNN Tax Professional at 800.244.7444