Economic Stimulus Act of 2008
Summary and Examples On February 13, 2008, President Bush signed into law the Economic Stimulus Act of 2008, setting in motion the process of getting billions of dollars into the pockets of taxpayers, seniors living on Social Security and disabled veterans across the nation. The package will also bring immediate tax relief to the business community. For the restaurant industry, it will put money into the pockets of its employees, help grow businesses and spur additional spending on restaurant meals. Rebate Checks The much talked about rebate checks will range from $300-$600 for individual taxpayers and $600-$1200 for married couples filing jointly. Most working individuals will receive a $600 rebate assuming they paid at least that much in federal income tax. Rebate checks will be based on 2007 federal income tax filings. The rebates are gradually phased-out for individuals earning $75,000 and fully eliminated at $87,000 (for joint filers the rebate is phased-out earning $150,000 and fully eliminated $174,000.)* In addition, any person who qualifies for a rebate credit is also eligible for an additional $300 rebate for each dependent child. For example, a couple filing jointly with two children and a combined income of $80,000 will receive a $1,200 basic rebate plus $300 payments for each child totaling $1,800. There is no cap on the number of children for the bonus rebates, just a cap on the adjusted gross income. Those individuals who earned at minimum of $3,000 (as individual or joint filers) in wages or other earned income (including Social Security and VA disability) will receive a $300 rebate check ($600 for joint filers) even if they have no tax liability. The Internal Revenue Service is expected to begin issuing checks in early May, once the 2007 tax filings have been completed. Therefore, checks will not be issued until the taxpayer’s 2007 tax return is filed. For those with federal debts or unpaid child support the rebate checks will be offset against that debt. Included in the package were two significant business tax provisions. Section 179 Small Business Expensing (for Federal tax returns only) Under Section 179 of the tax code, a small business can immediately write-off the cost of certain qualified purchases, rather than depreciate the cost over a scheduled number of years. The amount is limited to $125,000 with a phase-out threshold of $500,000 in total purchases. Qualified purchases include tangible capital assets such as machines, equipment, computer hardware and software, furniture, vehicles and other non-structural items. For the most part anything not associated with purchasing real estate and structural changes to a property could qualify under this section. Under the new law, the immediate expensing limit is increased to $250,000 and the phase-out threshold is increased to $800,000 in total purchases for 2008. As long as total purchases for the year do not exceed $800,000 than the business qualifies for the full expensing limit of $250,000. For every dollar above the $800,000, the business losses a dollar of expensing, which means it would be fully phased-out at $1,050,000 and the business no longer qualify for expensing under Section 179.
Bonus Depreciation Additionally, the stimulus package includes a bonus depreciation provision for certain qualified purchases. This will encourage businesses to make new investments by allowing an immediate 50 percent deduction for the cost of the purchase. Generally, for purchases such as equipment, businesses write-off the cost of the items over a period of time i.e. a deprecation schedule. For equipment, the cost is written off over a 20year schedule. Under the new law, businesses can immediately write-off 50 percent of the cost of the item and then write-off the remaining amount on a normal depreciation schedule. This applies to purchases made and placed into service in 2008. The bonus depreciation will also be allowed under the alternative minimum tax (AMT). The types of assets eligible for bonus depreciation will be the same as those included in the previous depreciation packages: tangible property that had a recovery period not exceeding 20 years; purchased computer software; water utility property; and qualified leasehold improvement property (meaning interior improvements made to non-residential property by a landlord or tenant) Examples Small Business Expensing (for Federal tax returns only) A restaurant owner purchases a new point of sales system at a cost of $240,000 and computer software upgrades for another $20,000. Assuming the owner’s total purchases meet the $800,000 threshold, the owner can expense $250,000 of the combined items in 2008. The $10,000 that exceeds the amount must be depreciated—generally the item with the shorter depreciation schedule. BUT, that remaining $10,000 qualifies for the bonus depreciation, therefore, $5,000 can be immediately written off, and the remaining $5,000 placed on the appropriate depreciation schedule. Bonus depreciation For example, if a multi-unit restaurant company purchases a new point of sales system at a cost of $1 million, the business can immediately deduct $500,000 of the cost. If the property qualifies for a 5-year depreciation schedule, the remaining amount of $500,000 will be written-off over a normal schedule. Keep in mind this applies to items purchased and placed in service in 2008. Net Operating Losses Left out of the stimulus package was a provision to extend the “carry-back period” for net losses to five years from two years. The change would have allowed a business to write off losses in 2006 and 2007 against profits they posted in the past five years, rather than the last two years. This was a disappointment to many business organizations that had pushed for its inclusion.
*The amount of annual earnings determining the phase-out are adjusted gross incomes (AGI) and result in a $50 reduction in rebate for every $1,000 in income about the initial amount, i.e. $75,000 (single) and $150,000 (married).