Year End Acquisitions for Year End Deductions

Author: Ronald E. Lyons Date: 12/05/2008

Categories: Corporate and Business Law, Tax Services

With all of the turmoil in our economy, it would be easy to just hunker down and tighten the belt. There are, however, some real economic incentives to purchase certain machinery and equipment that will substantially boost your 2008 deductions.

Under the Economic Stimulus Act of 2008 (the “Act”), there is a 50% bonus first year depreciation for purchasing business equipment, machinery and most software so long as it is acquired in 2008 AND placed in service by the end of the current calendar year. The 50% first-year depreciation allowance is applied to the adjusted basis of the property as reduced by any IRC Section 179 expensing claimed for the property. Regular depreciation is applied to the property’s adjusted basis following reduction for the bonus depreciation.

Generally speaking, the Act applies to tangible personal property with a MACRS recovery period of 20 years or less, certain software and qualified leasehold improvements provided that the asset is acquired and placed into service after December 31, 2007 but before January 1, 2009. The bonus depreciation is calculated without any proration based upon the length of the tax year.

As you might anticipate, there are a number of exceptions and exclusions. For example, the 50% bonus depreciation will still be available for qualifying reuse and recycling property purchased and placed in service in 2009. Other assets that are not expensed under IRC Section 179 (such as residential rental property and nonresidential realty) cannot have their acquisition price exceed 40% of all such property placed in service during the entire year.

In some situations, accelerating a purchase into 2008 may not be a good idea. If a taxpayer has net operating losses that are about to expire, accelerating depreciation may not be desirable. As always, check with your CPA.