The recently passed Economic Stimulus Act of 2008 is designed to inject $152 billion into the U.S. economy, including two incentives that retail environments businesses may take advantage of immediately. First, small business expensing has been increased. Second, bonus depreciation is back!

Small Business Expensing The Act permits a business to expense up to $250,000 of the cost of qualifying property purchased and placed in service for taxable years beginning in 2008. Generally, the property must be tangible personal property, which is used in the taxpayer’s business and for which a depreciation deduction would be allowed. The property must also be newly purchased property and used for business more than 50 percent. If more than $800,000 is placed in service, the amount in excess of this investment limitation reduces the $250,000 expense dollar for dollar. Without the Economic Stimulus Act, the amount that could be expensed in 2008 was $128,000 with a total investment limitation of $510,000.

In addition, the existing exception for computer software applies to the enhanced expensing amounts under the Act. The Act did not change the taxable income limitation. This provision limits such expensing to the amount of taxable income of the business. The expense deduction cannot directly create a loss for the business.

The enhanced expensing permitted by the Act is applicable only for taxable years beginning in 2008. Therefore businesses with a fiscal year, rather than a calendar tax year, should consider deferring purchases of equipment and other qualifying property until after their fiscal year begins in 2008. Unless this provision is extended, this provision will not apply to future years.

Bonus Depreciation The Act also provides qualifying taxpayers 50–percent, first–year bonus depreciation of the adjusted basis of qualifying property. The types of property eligible for bonus depreciation will be the same as those eligible under earlier bonus depreciation acts and must be acquired and placed in service after Dec. 31, 2007, and before Jan. 1, 2009. The property’s original use must begin with the taxpayer. Used property will not qualify for the deduction. Bonus depreciation will be allowed for alternative minimum tax as well as for regular tax purposes. There are exceptions for certain transportation property.

How do these two provisions work together? The Small Business Expense is claimed prior to the Bonus Depreciation.


Example: A business has $1 million of taxable income before using the small business expense and bonus depreciation. In 2008 the business purchases $800,000 of new five–year qualifying equipment and places it in service. What amount can be expensed, and what is the maximum amount that can be depreciated in 2008?

Since the business has not exceeded the investment limitation of $800,000, the company is eligible to claim the maximum $250,000 as an expense. This $250,000 reduces the investment amount of $800,000 to $550,000. The 50–percent bonus depreciation is applied to this adjusted amount to give $275,000 of bonus depreciation. The remaining balance of $275,000 is subject to the normal depreciation rules. First–year depreciation for a five–year asset is 20 percent and would equate to $55,000 of depreciation.

In summary, the company would have $250,000 of small business expensing and $330,000 of depreciation (which includes $275,000 of bonus depreciation). The total amount deducted in the year the assets were acquired is $580,000 or 72.5 percent of the equipment purchase.


If more than 40 percent of the aggregate basis of the taxpayer’s depreciable property (excluding most real property) additions is placed in service during the last three months of the year, the midquarter convention would be required. This convention normally means less depreciation for the year. Check with your tax adviser regarding the specific impact of purchases made in the last three months of the year.

For state purposes, the majority of states have not allowed bonus depreciation in the past. Each state will need to be reviewed to see if existing law covers this bonus depreciation, or if additional guidance will be required to determine bonus depreciation conformity.

Building a new facility is a major capital investment. Costs can be most effectively categorized into real and personal property through a Cost Segregation study. By depreciating assets over the shortest possible lives, tax deductions through depreciation are accelerated. Accelerated tax deductions equals reduced federal and state income taxes, increasing cash flow for the business. Add to this bonus depreciation, and the benefits of a Cost Segregation study are even greater. In addition, state and local property taxes and real estate taxes may also be reduced.

These are some very generous changes. If you are thinking about making a purchase for your business, talk to your tax advisor to maximize your savings under the Act.