The federal government’s Economic Stimulus Act is best known for its individual rebates, but there are components that are designed to jumpstart business spending as well:

Q. How does the Economic Stimulus Act relate to business?

A. There are two main business areas; the first is increased asset expense allocation. The economic stimulus package doubles the current small business expensing limit from $128,000 to $250,000. This provides business owners with an immediate deduction for the entire cost of certain investments made in their business, such as purchasing new equipment. This applies only to business owners who invest less than $800,000 in their business this year.

The second is the bonus depreciation allowance, which provides a valuable tax break in the form of bonus depreciation. The incentive allows all qualifying taxpayers to claim an immediate 50 percent deduction for certain qualifying depreciable property acquired and placed in service in 2008.

Q. Are there restrictions on these incentives?

A. There are important guidelines that lay out how the benefits can be applied:

Increased Asset Expense Allocation

- Applies to depreciable tangible personal property placed in service in 2008

- For other than calendar year taxpayers, additional limitations apply to purchases eligible for increased expensing during 2008. If this applies to clients, CPAs should be sure they are aware and take the time to walk through the limitations with them.

- Includes off-the-shelf computer software

- Property must be used in the active conduct of a trade or business

- Must be newly purchased property

- The $250,000 maximum amount that can be expensed is reduced dollar-for-dollar if quali

fying property is in excess of $800,000 (increased from $510,000)

- Enhanced expense amounts will expire at end of 2008

Bonus Depreciation Allowance in 2008

- Applies to purchases of tangible personal property (including construction, mining, forestry, and agricultural equipment) with a depreciation period of 20 years or less

- Equipment must be new

- Equipment must be purchased and placed in service in 2008

- Not applicable if a binding purchase contract existed prior to Jan. 1, 2008

- Allowed for both regular and alternative minimum tax purposes

- This is completely discretionary – the taxpayer does not need to claim the depreciation bonus

- Depreciation bonus will expire at end of 2008

Q. What kinds of business is the Act targeting?

A. There is no one sector, although small to mid-sized businesses will benefit most. The Act will be particularly helpful for businesses that may be on the brink of expansion; the costs associated with ramping up can be mitigated as new equipment purchases – whether for general infrastructure, IT, manufacturing, etc. – will be mitigated during this time frame.

And of course, by investing in equipment now companies will be adding another boost to the economy. It will not only be through the cash injections associated with large purchases, but the benefits of expansion: growth means more jobs, more sales, and healthier enterprises all around.

Q. Has this approach worked in the past?

A. Stimulus Acts aimed at small to mid-sized businesses have been successful short term solutions in the past. For example, when the economy sagged after 9/11, President Bush put forth a similar initiative that took effect in 2003. That provision allowed companies to write off $75,000 in expenses, tripling the previous cap. The Associated Press reported in January of 2003, “The White House estimated that 23 million small business owners would receive an average tax cut in 2003 of $2,042… The administration’s hope is that giving such breaks to entrepreneurs and other smaller companies would lead them to expand, adding jobs in their own shops while boosting the broader economy with demand for products.”

In the end, the role played by small businesses may have been minor, but there is no doubt that the overall economic injection helped improve the environment. According to the CIA World Factbook, the GDP was up 3.10% in 2004 and 4.40% in 2005, before slipping back to 3.20% in 2006 and 2007, leading to today’s flat environment.

Q. Are there steps that companies should take to get the most benefit out of the current package?

A. First, companies need to keep the timeline in mind: purchases have to be placed in service in 2008, so lead time for buying, receiving and implementing equipment should be considered. Second, those making the purchases should talk to their CPAs to be sure they are matching up with the requirements and getting the full benefit from the Act.

This entry was posted on Monday, July 7th, 2008 at 8:00 am and is filed under Economic Stimulus, Q&A. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.