The recently enacted Economic Stimulus Act of 2008 provides both an expanded Section 179 deduction and 50% bonus depreciation. These are incentives in the law, for 2008 only, but the effective dates are tricky for fiscal year entities.
Background
On February 7, 2008, both the House and Senate passed H.R. 5140, the Economic Stimulus Act of 2008. This legislation provides the well-publicized individual rebates for lower and middle income filers. For business taxpayers, there are two significant depreciation enhancements, The Section 179 first-year expensing deduction has been nearly doubled. Second, the 50% bonus depreciation that existed temporarily after the 9-11 terrorist attacks has been restored for one year also.
Section 179 Enhancement
Under previous law for 2008, the Section 179 first-year deduction for items such as farm equipment, bins, drainage tile, irrigation systems, and single purpose livestock structures was $128,000. The asset addition phaseout limit caused a $-for-$ reduction in the Section 179 limit if eligible asset additions exceeded $510,000. For example, if a farmer added $600,000 of eligible additions in 2008, which is $90,000 over the phaseout threshold, the $128,000 Section 179 amount would have been reduced to $38,000.
The Economic Stimulus Act moves the Section 179 deduction to $250,000, effective only for tax years beginning in 2008. Also, the asset addition phaseout threshold is increased from $510,000 to $800,000. Accordingly, the phaseout range extends all of the way to $1,050,000 of eligible Section 179 asset additions in 2008 before Section 179 is fully phased out.
Example: Fred, a successful grain farmer with high profitability, learns that Section 179 is greatly expanded for 2008, and acquires $900,000 of eligible equipment additions. Fred is $100,000 over the asset addition phaseout threshold, and accordingly his eligible Section 179 deduction for 2008 is reduced from $250,000 to $150,000.
50% Bonus Depreciation
The Economic Stimulus Act restores the same bonus depreciation under IRC Sec. 168 (k) that previously was in the law from September 11, 2001 through December 31, 2004, but only for the year 2008. Fortunately, for farmers virtually all assets qualify for this 50% bonus, even machine sheds that are not eligible for Section 179. The basic rules are that the asset addition for the 50% bonus must:
- Have a recovery period of 20 years or less (this covers virtually all farm assets, including machine sheds and other general purpose storage buildings),
- The original use of the property must commence with the taxpayer (i.e., the asset is new rather than used), and
- The asset is both acquired and placed in service after December 31, 2007 and before January 1, 2009.
In the case of an asset acquired by trade, both the boot and the adjusted basis of the relinquished asset qualify for the 50% bonus [Reg. 1.168(k)-1(f)(5)(iii)].
As in the past, a taxpayer will be able to elect out of using the 50% bonus depreciation. However, the election must be made by "class of property" which refers to the 3, 5, 7, 10, 15 and 20-year recovery period classes. The election to not claim the 50% must be made for all additions within an asset class placed in service during 2008 [IRC Sec. 168(k)(2)(C)(iii)].
Effective Date Differences
As noted earlier, both depreciation incentives are effective for one year only. Our clients need to understand that these are intended to stimulate the economy, and the assumption should be that Congress will not renew these (unlike the many other "extenders" which are routinely renewed by Congress).
But the effective date rules are inconsistent for some taxpayers. For calendar year individuals and business entities, both the enhanced Section 179 deduction and the 50% bonus depreciation are effective for calendar year 2008. But for fiscal year businesses, the expanded Section 179 deduction applies to the fiscal year beginning in 2008, while the 50% bonus depreciation applies from January 1 to December 31, 2008.
Unique Times for Grain Producers
In these times of high grain prices, those producers who are in need of capital expansion (new machinery, barns, bins, or machine sheds) will find that these depreciation incentives give them the ability to liquidate grain and claim an offsetting deduction in the form of additional depreciation. We should caution our clients that capital improvements should be first driven by business needs and not by a partial tax subsidy. But for those who are considering expansion or replacement capital expenditures, the case for doing so in 2008 rather than later is compelling.
Summary
The expanded Section 179 deduction and restored 50% bonus depreciation will be attractive opportunities for those ag producers realizing higher incomes and in need of capital improvements. Here is a quick summary of key differences in these two provisions:
New vs. used: Section 179 - Both; 50% Bonus - New only
Trades: Section 179 - Boot only; 50% Bonus - Entire basis
Eligible: Section 179 - Sec. 1245 prop.; 50% Bonus - All farm assets
This notice is required by IRS Circular 230, which regulates written communications about federal tax matters between tax advisors and their clients. To the extent the preceding information and or any attachment is a written tax advice communication, it is not a full "covered opinion." Accordingly, this advice is not intended and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. Such assurances can be granted only by securing a covered opinion letter. Should you wish to explore the option of receiving a covered opinion letter relating to a tax advice matter, please contact us.
Andy Biebl and Bob Ranweiler - Biebl Ranweiler Education Services
