Information for Businesses: Frequently Asked Questions & Answers
Don’t miss out. You still have until Oct. 15 to file a tax return to claim your payment this year. Bonus depreciation allows taxpayers to take a deduction of 50% of all property placed in service with a class life of 20-years or less. The remaining basis for the shorter life property gets depreciated over the applicable MACRS recovery period. For every $1 million of 5-year property, the deduction will be approximately $600,000 in the first year.
Bonus Depreciation Qualifications:
To qualify for bonus depreciation in the first year, several criteria must first be met:
• Depreciable property will qualify if the original use of the property commences with the taxpayer after December 31, 2007 and before January 1, 2009 but only if no written binding contract for the acquisition of the property was in effect before December 31, 2007.
• Qualifying property is MACRS property that has a recovery period of twenty years or less.
• It may not be property that is required to be depreciated under the alternative depreciation system of section 168.
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Q. Am I entitled to the business portion of the stimulus package even if my adjusted gross income exceeds the threshold that phases out the basic credit?
A. The individual and business parts of the legislation are separate and have different qualifications.
Q. What types of acquisitions will qualify for the 50 percent depreciation deduction? I am specifically wondering if farm buildings will qualify for this accelerated depreciation.
A. To qualify for this deduction, property must have a recovery period of 20 years or less. Farm buildings normally qualify since they have a general depreciation recovery period of 20 years. The alternative recovery period of 25 years does not have to be considered unless the property is required to be depreciated under the Alternative Depreciation System.
Q. What changed in 2008 for businesses under the Economic Stimulus Act?
A. Changes include increased section 179 limits and special depreciation allowance for certain property. Note: the linked page reflects both 2007 and 2008 changes.
Q. What effect does the Stimulus Act have on section 179 depreciation?
A. The Act changed two things: it increased the amount of the 179 depreciation deduction and it raised the phase-out amount. Without the new law, the 179 depreciation deduction limit in 2008 would have been $128,000. It’s now increased to $250,000. The phase-out rule reduces the allowable 179 depreciation deduction if the amount of section 179 property you place in service exceeds a set amount for the year. That amount would have been $510,000 for 2008 but the Act increased it to $800,000.
Q. What is 50 percent special depreciation?
A. The 50 percent special depreciation is for new, tangible assets purchased and placed into service in 2008. For these assets, a taxpayer is entitled to depreciate 50 percent of the cost or other basis during the year the asset is placed into service. The remaining cost or other basis would be depreciated over the normal life of the asset.
Q. Is 50 percent special depreciation new in 2008?
A. Special depreciation was originally in effect from Sept. 11, 2001 through Dec. 31, 2004. After 2004 special depreciation was available for only the Liberty Zone in New York and the Gulf Opportunity Zone. The Stimulus Act again makes special depreciation available throughout the entire United States.
Q. Can 50 percent special depreciation be used along with other types of depreciation?
A. Yes, it is possible for an asset to qualify for up to three different types of depreciation at the same time in the year the asset is placed into service. An asset can qualify for section 179 depreciation, 50 percent special depreciation and a regular depreciation method such as modified accelerated cost recovery system or MACRS simultaneously.
Q. Can you provide an example of how these three depreciation types can be used in conjunction with one another?
A. To illustrate, let’s assume a small business owner paid $400,000 for a qualifying asset — equipment, for instance — and placed it into service in 2008.
*First, he applies the section 179 depreciation provision to deduct the new maximum 179 depreciation deduction, or $250,000. That leaves $150,000 that has not yet been depreciated.
*Next, he takes the remaining $150,000, and applies the 50% special depreciation for an additional deduction of $75,000.
*That leaves the other 50 percent, or $75,000, to which he can apply MACRS. If the asset is a five year asset, he would be able to deduct 20 percent of the remaining $75,000 cost or basis, for an additional $15,000 deduction.
Using all three of these tax provisions would produce a $340,000 deduction in 2008 for an asset that cost $400,000.
Q. What if I do not want to use special depreciation?
A. If you choose not to use special depreciation, you must elect out of it in writing on your tax return.
Q. Is special depreciation allowed against the Alternative Minimum Tax?
A. Yes, special depreciation is allowed against both regular tax and Alternative Minimum Tax.
Q. Do all states follow the federal depreciation rules?
A. No. From Sept. 1, 2001 through Dec. 31, 2004, twenty-five states did not follow the federal special depreciation rules. Check with your state taxation agency or your accountant to see if your state is following the federal special depreciation rules.
Q. Is there a new depreciation and amortization form for fiscal year filers?
A. Yes, Form 4562-FY and instructions are now available.
Q. What property qualifies for special depreciation?
A. See the 2008 section of the Depreciation and Section 179 Expense information for examples of qualifying property, determining tests and property that does not qualify.
Click here for your FREE Bonus Depreciation/Cost Segregation Analysis
Whether you are buying, building or improving a building, SourceCorp can help maximize your income tax deductions through our in-depth cost segregation service.
About SourceCorp:
Celebrating our 25th year in business, SourceCorp Professional Services provides Energy Efficient Commercial Tax Deduction Certification, LIFO Accounting, R&D Tax Credit Studies, Bonus Depreciation, and Cost Segregation Studies. With a team of nearly 70 professionals and with offices located throughout the country, SourceCorp helps clients realize unparalleled experience, services, and trust. SourceCorp serves many of the nation’s most prominent CPA firms, Associations, and Fortune 1000 companies. For more information, please call 817.732.5494 or visit www.SourceCorpTax.com.
