Economic Stimulus Act of 2008 (H.R. 5140)

On February 7, 2008, Congress passed the Economic Stimulus Act of 2008 (the “Act”), which President Bush signed into law on February 13, 2008. In addition to providing widely-publicized stimulus payments to qualified individuals, the Act includes a number of significant but temporary incentives for businesses. You may access a copy of the Act by clicking here.

The business incentives are generally aimed at encouraging businesses to increase their investments in new equipment. Under the Act, subject to certain limitations, businesses will be able to expense up to $250,000 of qualifying property placed in service during their taxable year beginning during 2008. Additionally, businesses generally will be able to take “bonus depreciation” of 50% of the cost of certain qualified property acquired and placed in service during the 2008 calendar year.

Enhanced Section 179 Expensing

Under the Act, taxpayers may elect under Section 179 of the Internal Revenue Code (“Code”) to expense and currently deduct (instead of depreciating over a period of years) up to $250,000 of the cost of qualifying property placed in service in their taxable year that begins during 2008. This amount is reduced by the amount by which the cost of all qualifying property placed in service in that taxable year exceeds $800,000. Qualifying property is generally depreciable property acquired by purchase for use in the active conduct of the taxpayer’s trade or business. The deduction in any taxable year is limited to the amount of taxable income from any of the taxpayer’s active trades or businesses during that taxable year. Any amount subject to this limitation may be carried forward into future taxable years, subject to similar limitations.

Absent this new legislation, the expensing limit for the taxable year beginning during 2008 would have been $128,000, and that amount would have been reduced by the amount by which the cost of all qualifying property placed in service in that taxable year had exceeded $510,000. Thus, the Act almost doubles the amount a business may immediately expense, while allowing more businesses to take advantage of this deduction by increasing the threshold for reducing the deduction. The upshot is that small and medium-sized businesses may be able to write-off a greater amount of their investments in business property in 2008.

Bonus Depreciation

The Act also provides for accelerated or “bonus” depreciation by allowing an additional first-year depreciation deduction of 50% of the adjusted basis of certain qualified property. The additional first-year depreciation deduction is allowed for both regular tax and alternative minimum tax purposes for the taxable year in which the property is placed in service. The basis of the property and the depreciation allowances in the year the property is placed in service and in subsequent years are adjusted to reflect the first-year bonus depreciation deduction.

In order to be eligible for bonus depreciation, the property must be (1) property to which the Code’s modified accelerated cost recovery system applies (generally most tangible property) and which has a recovery period of 20 years or less, (2) water utility property, (3) non-custom-made computer software, or (4) qualified leasehold improvement property. The taxpayer must be the original user of the property, and in general acquire the property and place it in service in calendar year 2008. Certain property may be eligible for bonus depreciation even if not placed into service until calendar year 2009. 

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As noted above, these two business incentives are not permanent. Businesses must act within the time frames specified by the Act to take advantage of these provisions. With careful planning, businesses can optimize the effect of these incentives. Businesses that are considering making an investment in capital equipment within the next few years may want to consider accelerating such acquisitions. On the other hand, businesses that were already planning to make investments in capital equipment in their taxable year beginning in 2008 may now want to consider deferring some of their purchases of such equipment until their taxable year beginning during 2009 in order to qualify for the full $250,000 expensing limit under Code Section 179 (i.e., by not exceeding the $800,000 overall investment threshold described above).

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Winston Chang, an O’Melveny counsel licensed to practice law in California, and Ryan Austin, an O’Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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