President George W. Bush signed the Economic Stimulus Act of 2008 (Act) into law as P.L. 110-185 on February 13, 2008. The Act contains a number of provisions, some of which are important to the affordable housing community, namely $44.8 million in two temporary business tax incentives in the form of bonus depreciation and enhanced expensing.
Similar to the bonus depreciation available following September 11, and in the New York Liberty Zone or the Gulf Opportunity Zone, the Act provides businesses a 50 percent first-year bonus depreciation of the adjusted basis of qualifying property for the taxable year in which the property is placed in service. Bonus depreciation reduces the adjusted basis of the property before computing regular tax depreciation on the remaining basis.
- Property depreciable under Modified Accelerated Cost Recovery System (MACRS) over 20 years or less;
- Water utility property;
- Off-the-shelf computer software; and
- Qualified leasehold improvement property.
In the Low Income Housing Tax Credit (LIHTC) context, the following property should be eligible for bonus depreciation: capitalized site work depreciable over 15 years and capitalized personal property such as appliances, carpeting, blinds and office furniture, computers and telephone systems used in the building management office. The building itself is not eligible for bonus depreciation because it is depreciable over 27.5 years. Property that is financed with tax-exempt bonds, or that otherwise constitutes tax-exempt use property, does not qualify for bonus depreciation. Finally, the cost of property constructed prior to January 1, 2008 by the business, or a party related to the business, for its own use or for use by a related party is not eligible; however, costs for property constructed from January 1, 2008 until December 31, 2008 can be eligible.
Generally, to qualify for bonus depreciation, the eligible property must be purchased and placed in service in calendar year 2008. Accordingly, the original use of the property must begin with the business and must occur after December 31, 2007 and before January 1, 2009. Property does not qualify if the business, or a party related to the business, had a binding written contract before January 1, 2008 to acquire the property. A contract is considered binding even if it is subject to a condition, as long as the condition is not within the control of either party or a predecessor. An option to either acquire or to sell property is not a binding contract.
To claim the bonus depreciation for eligible property, the building in which the tangible personal property is located must be placed in service during 2008. For example, appliances purchased and installed in a new building in 2008 are not eligible property unless the building in which they were installed is placed in service in 2008. The placed-in-service date is extended until December 31, 2009 for property with a recovery period of 10 years or longer, i.e., depreciable site work. The cost for such work, however, must be incurred prior to January 1, 2009 even though such work can be placed in service at any time prior to January 1, 2010.
The following chart summarizes what property is eligible for bonus depreciation.
The enhanced expensing allowed in the Act permits a business to more quickly write off investments in its business property. Generally, a business must recover the cost of an asset over time through depreciation. Code Section 179 provides an exception to this general rule and permits a taxpayer to currently deduct (expense) the cost of certain assets. Prior to the new law, Code Section 179 allowed a taxpayer to expense up to $128,000 of the cost of depreciable tangible personal property used in the active conduct of a trade or business that was placed in service in tax year 2008. However, the amount that can be expensed is reduced dollar-for-dollar by the amount of all property placed in service by the business during 2008 that exceeds, under prior law, $510,000. Code Section 179 expensing is sometimes called "small business" expensing because businesses that purchase a large amount of equipment each year (more than $1.05 million for 2008 under prior law) are phased out of Code Section 179 expensing. These amounts are inflation adjusted.
A business may deduct enhanced expenses, bonus depreciation and regular depreciation for the same property in the same tax year. Any amount expensed pursuant to Code Section 179 reduces the basis of the property prior to computing depreciation including bonus depreciation.
The Act increases the amount that a business can expense under Code Section 179. Under the new law, a business can expense up to $250,000 of qualifying property that is both purchased and placed in service during the business's taxable year that begins in 2008. Further, the phase-out limit is also increased to $800,000, which means that a business is fully phased out if it places in service $1.6 million or more of qualified property in its 2008 taxable year. These amounts are not adjusted for inflation.
Only costs for "qualified property" can be expensed under Code Section 179. Generally, qualified property includes tangible personal property and certain computer software actively used in a trade or business and for which a depreciation deduction would normally be allowed, i.e., capitalized personal property such as appliances, carpeting, blinds and office furniture, computers and telephone systems used in the building management office. The property must be used more than 50 percent for business and must be newly purchased property. If a business sells property for which it has taken a Code Section 179 expense deduction, or stops using it more than 50 percent for business, then part of the expense deduction is recaptured. The recapture amount equals the difference between the amount that the business expensed and the amount that the business would have been allowed to take as a deduction under the depreciation rules.
Businesses not on a calendar year should note that the enhanced expensing applies to tax years beginning in 2008. For example, if business B's tax year begins on January 31, qualifying property purchased and placed in service by B on January 15, 2008 would not qualify for the enhanced expensing; however, qualifying property purchased and placed in service on February 15, 2008 does qualify for enhanced expensing (provided that B's ability to expense the cost is not phased out).
For further information on this Act or on other taxation issues, please contact your principal Squire Sanders lawyer or one of the individuals listed in this Alert.