Economic stimulus act creates business incentives

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by Brian Bernhardt

Most press reports on the Economic Stimulus Act of 2008 have focused on the $600 tax rebates taxpayers will receive this spring.  Less discussed — but perhaps more important — are the two business incentives included in the law.

These incentives create almost $50 billion in potential tax savings for businesses. Through these incentives, Congress hopes to encourage businesses to buy new equipment, software and tangible property in 2008 because they allow businesses to decrease their Federal tax liabilities.

One incentive is a 50 percent depreciation allowance for 2008 purchases. Under the new law, taxpayers may depreciate 50 percent of the cost of certain property put in service in 2008.  Qualifying property includes property which is eligible for depreciation over 20 years or more, water utility property, off-the-shelf computer software and certain leasehold property.  This incentive is similar to the special “bonus” depreciation previously available for certain property generally placed in service before January 1, 2005.

The second incentive is an increase in the deductions businesses may claim for newly purchased depreciable tangible personal property. Under the old law, a business could automatically deduct up to $128,000 of newly purchased business property. Under the new incentive, however, the $128,000 deduction has increased to $250,000. 

In addition, the old law began phasing out the benefit of this deduction if the cost of the property exceeded $510,000.  Under the new incentive, however, the phase-out does not begin until $800,000. As a result, a business purchasing up to $800,000 of equipment this year would be able to immediately deduct up to $250,000 of its investment, up from $128,000 in 2007. 

Although these business incentives have been overshadowed in the news by the tax rebates for individuals and families, these tax breaks for businesses are invaluable in their own right.  By making purchases in 2008 rather than deferring them until 2009, even if the economy might dictate a deferral of expenses, your business might come out far ahead after taking tax benefits into account.

Brian Bernhardt is a partner in the Richmond office of McGuireWoods LLP. He practices in the areas of Federal tax controversies, Federal tax litigation, and nonprofit and tax-exempt organizations, focusing on their administrative relationships with the Internal Revenue Service.


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