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On February 13, 2008, President Bush signed into law the Economic Stimulus Act of 2008.¹ The legislation was enacted to provide economic stimulus through incentives for business investment and immediately refundable credits to individuals.² The Act's provisions for business incentives and individual credits are summarized below.

Incentives for Businesses

The Act provides incentives for businesses in the form of enhanced expensing and bonus depreciation provisions for equipment purchased and placed into service during 2008.

Enhanced Expensing

Section 179 allows small businesses to elect to deduct as a current expense a portion of the cost of §179 property equipment rather than recovering such cost over several years. Section 179 property is either: (1) tangible property (to which §168 applies); or (2) computer software (to which §167 applies).

The Act amended §179 by increasing the maximum amount a small business may elect to deduct for the current tax year from $128,000 to $250,000 of the cost of §179 property placed in service during 2008. The amount allowed as a deduction pursuant to §179, however, is reduced by the amount by which the cost of all §179 property placed in service by the taxpayer during 2008 exceeds $800,000.

Bonus Depreciation

Through amendments to §168(k), the Act provides for bonus first-year depreciation for both regular tax and alternative minimum tax purposes. Section 168(k), which expired in 2005, provided bonus depreciation on “qualified property” in the year that the property was placed in service for property placed in service before January 1, 2005 (or 2006 for certain property). Section 168(k) provided for either 30% bonus depreciation or 50% bonus depreciation depending primarily on the date the property was acquired and placed in service.

The Act's amendment to §168(k) provides for 50% bonus depreciation for 2008 for any qualifying property purchased and placed into service before January 1, 2009. Qualifying property means: (1) tangible property with a recovery period not in excess of 20 years; (2) purchased computer software; (3) water utility property; and (4) qualified leasehold improvement property. The placed in service deadline is extended until January 1, 2010 for property with a recovery period of 10 years or longer and certain transportation property (including certain aircraft).

Qualifying property is treated as purchased during 2008 only if no written binding contract for the acquisition was in effect before January 1, 2008, but is treated as purchased if acquired pursuant to a binding written contract entered into after December 31, 2007 and before January 1, 2009.

Property manufactured, constructed, or produced by the taxpayer is treated as qualifying property purchased prior to January 1, 2009, if the manufacture, construction or production begins after December 31, 2007 and before January 1, 2009. Additionally, property that is manufactured, constructed, or produced for the taxpayer by a third party under a contract that is entered into prior to the manufacture, construction, or production of the property is considered to be manufactured, constructed, or produced by the taxpayer.

Individual Credits

The Act provides two types of fully refundable credits to eligible individuals for 2008. The credits consist of a basic credit and a qualifying child credit both of which are phased-out at a rate of 5% of adjusted gross income in excess of $75,000 for individual taxpayers and $150,000 for joint filers.

Although the credit applies against the 2008 tax liability, the government will rebate the credit to taxpayers as soon as possible during 2008 by check or direct deposit. In order to effectuate the rebate during 2008, the IRS will use information from the taxpayer's 2007 return to compute the rebate.

Eligible individuals may benefit from a basic credit of $300 ($600 for joint filers) up to $600 ($1,200 for joint filers). Individual taxpayers are entitled to benefit from the credit if they have at least $1 of tax liability or $3,000 in qualifying income, but less than $87,000 of income ($174,000 for joint filers).³ An eligible individual is any individual other than: (1) a nonresident alien; (2) an estate or trust; or (3) a dependent. The credit is available only to eligible individuals that include a social security number on their tax return. A social security number must be included for both spouses and all children for which a child credit is claimed.

Additionally, eligible individuals that are otherwise entitled to the basic credit are entitled to a child credit of $300 for each qualifying child of the individual. A “qualifying child” is defined as a child that is under the age of 17 and is the taxpayer's child, stepchild, adopted child, eligible foster child, sibling, stepsibling or a descendant of any of those individuals, who lives with the taxpayer for more than half of the tax year and does not provide more than half of his or her own support.

Insight and Commentary

For businesses considering the acquisition or construction of new equipment in the near future, the enhanced expensing and bonus depreciation provisions provide for opportunities to decrease their 2008 tax liability. Accordingly, to the extent possible, businesses may want to consider structuring planned acquisitions to take advantage of the Act's incentives. However, to the extent a business has a significant production activities deduction under §199, a taxpayer may effectively be creating a permanent reduction in its §199 deduction by electing for bonus depreciation. As a result, relevant taxpayer's may want to weigh the benefits of making such an election as if it materially increases its effective tax rate.

Taxpayers also may want to follow other relevant proposals that did not make it into the Stimulus package that might find their way into other bills working their way through Congress, including the extension of the NOL carryback to earlier years.

For more information, in the Tax Management Portfolios, see Maule, 506 T.M., Tax Credits: Concepts and Calculation, and Maule, 531 T.M., Depreciation: MACRS and ACRS, and in Tax Practice Series, see ¶3200, Refundable Credits, and ¶2370, Depreciation of Realty and Tangible Property.