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Bonus Depreciation Makes A Return
Ronald Reagan once stated, “The nine most terrifying words in the English language are, 'I'm from the government and I'm here to help.'”

However, this time it’s true; and the message is good news rather than something to fear. It was less than a month ago, on Feb. 13, 2008, that President Bush signed the Economic Stimulus Act (ESA) of 2008 into law. Among the stimulus act components were significant incentives to encourage equipment purchasing through the end of the year.

As a result, companies that buy equipment in 2008 will be able to depreciate an additional 50 percent of the cost of assets placed in service this year. The offer applies to purchases of tangible personal property, including construction, mining, forestry, and agricultural equipment, with a Modified Accelerated Cost Recovery System (MACRS) recovery period of 20 years or less. As with the depreciation bonus enacted in 2002, only new equipment is eligible.
This means that for both the regular tax and the alternative minimum tax, the first-year depreciation deduction otherwise allowed on certain qualified tangible personal property acquired and placed in service during 2008 is increased by 50 percent of the cost of such property.

The ESA also significantly increases Section 179 small business expensing levels for 2008. Under existing law, the Section 179 small business expensing limit for this year would have been $128,000 with a $510,000 phase-out threshold. For 2008, the ESA temporarily increases the expensing limit to $250,000 and the phase-out threshold to $800,000. Thus, in 2008, a small business can expense up to $250,000 as long as its qualified equipment purchases do not exceed $800,000. For each dollar that total equipment purchases exceed $800,000, the amount that can be expensed decreases by one dollar, which means that a company that makes $1,050,000 in total purchases will not be able to expense anything. They can, however, still claim the depreciation bonus.

As an example of how the deductions provided by the asset expense election and bonus depreciation would work, suppose Acme Excavating purchases and places in service machinery (5-year property) in its calendar 2008 tax year having a cost of $650,000, which will be subject to the half-year convention. Acme Excavation will elect to expense $250,000 under Sec. 179, leaving the machinery with a remaining depreciable basis of $400,000. Applying the bonus depreciation provided by the Act, Acme is entitled to a further deduction in 2008 of $200,000 (50% of $400,000), leaving the machinery with a remaining depreciable basis of $200,000. Standard first-year depreciation for 5-year property under the half-year convention is 20%, providing Acme Excavating with further depreciation on the machinery of $40,000. Accordingly, Acme Excavating is entitled to a total expense and depreciation deduction of $490,000 in 2008 on its $650,000 machinery. The remaining $160,000 cost of the property is recovered after 2008 under otherwise applicable rules for computing depreciation.

By increasing a company's tax deductions in 2008, the asset expense election and bonus depreciation helps trim tax bills in the short term. However, because there will be less to depreciate in the future, the company's tax bill in later years will be higher. That’s why the program is totally discretionary, which means the taxpayer isn’t required to claim the depreciation bonus if he or she doesn’t desire to do so.

If recent history is any indicator, however, the depreciation bonus will have a significant impact on business purchasing as indicated by studies that followed the enactment of the last temporary stimulus law inacted in 2002. As with any tax program, it’s always best to consult your tax advisor to see if you qualify for accelerated depreciation.

*Depending on your amount of new purchases for the year, percent may vary. Depreciation
provided by the 2008 Stimulus Package and Sec. 179 of the Internal Revenue Code and is not a Butler Machinery sponsored incentive.