March 2008 Technical Update
Bonus Depreciation Is Back!
We recently
provided a technical update on bonus depreciation in our January
newsletter which discussed this lucrative tax break that expired on
January 1, 2005. The good news is that the Economic Stimulus Act of 2008
revived 50% Bonus Depreciation. But don’t hesitate; the window of
opportunity is only available for first-use property placed in service
after December 31, 2007 and before January 1, 2009. The placed-in-service
date for specific assets such as transportation equipment and certain
aircraft property is extended to before January 1, 2010.
The
taxpayer can enjoy a healthy 50% bonus in first year depreciation for new
tangible personal property. The key here is that there must not have been
a contract in place prior to January 1, 2008 and the property must be new,
not used.
Qualifying property must fall into one of the following
categories:
- must be MACRS property with a recovery period of 20 years or less
- water utility property (see Section 168(e)(5))
- computer software not included in Section 179
- qualified leasehold improvements (see Section 168(k)(3))
Let’s look at an example to see how a taxpayer can benefit.
|
Taxpayer purchases new tangible personal
property (equipment, specialty millwork, etc.) costing $100,000 and
places it in service in 2008. Since this property qualifies for bonus
depreciation and is MACRS 5 year property, the taxpayer would
depreciate the asset as follows: |
||
|
Recovery |
|
|
|
|
|
|
|
2008 |
Bonus depreciation: |
$50,000 |
|
2008 |
$50,000 x 20%: |
$10,000 |
|
|
|
|
|
2009 |
$50,000 x 32%: |
$16,000 |
|
2010 |
$50,000 x 19.2%: |
$9,600 |
|
2011 |
$50,000 x 11.52%: |
$5,760 |
|
2012 |
$50,000 x 11.52%: |
$5,760 |
|
2013 |
$50,000 x 5.76%: |
$2,880 |
|
That $60,000 first year depreciation is 300% more than what was available with standard depreciation in 2007. |
||
In certain cases the
taxpayer will be operating at a loss and will not see any benefit from
bonus depreciation. In these rare instances, the taxpayer must elect out
of bonus depreciation. Consult your tax professional for a better
understanding of how bonus depreciation will affect your situation.