2008 Economic Stimulus Package Reinstates Bonus Depreciation and Section 179 Benefits for Businesses

Businesses and individuals undertaking new construction projects or tenant improvements this year may qualify for a bonus depreciation deduction, and expanded expensing provisions under IRS Section 179 as part of the 2008 Economic Stimulus Package.

The 2008 Economic Stimulus Act—signed into law February 11— provides for a 50% first-year bonus depreciation deduction for building construction expenses or improvements on certain types of property started between December 31, 2007 and December 31, 2008. In order to maximize potential tax benefits under bonus depreciation, a cost segregation study should be implemented to identify all construction-related costs that qualify for shorter depreciation periods. Cost segregation studies reclassify a substantial portion of a building project from 39 years (or 27 ½ years for residential income properties) into five-, seven- and fifteen-year properties.

Businesses that can benefit from cost segregation studies include manufacturing facilities, medical offices, warehouses, apartments and office buildings, hotels, resorts, strip shopping plazas, fast food restaurants and nursing and funeral homes. In addition to the normal accelerated deductions identified through cost segregation, these assets become eligible for bonus depreciation so taxpayers this year can take advantage of the new first-year 50% bonus depreciation rule. Businesses and individuals in the Gulf Opportunity Zone (Gulf region affected by hurricanes Katrina and Rita) have already benefitted from special bonus depreciation rules for 2006 and 2007 and are eligible for them again in 2008. Still, there may be additional benefits in the provisions of the new law for many Gulf region individuals and businesses.

Along with the new bonus depreciation rules, the 2008 Economic Stimulus Act nearly doubles the Section 179 limits—from $128,000 to $250,000 in 2008—on tangible personal property expenses that can be immediately deducted rather than depreciated over several years. Eligible expenses under section 179 include equipment, furniture and other tangible personal property that is purchased in 2008 and actively used more than 50% for business. The new law also raises the phase out threshold from $510,000 to $800,000 in 2008. That means that once a taxpayer spends more than $800,000 on a qualified property, the regulations begin to limit Section 179 deductions

Because of the complex nature of bonus depreciation and Section 179 calculations, we advise individuals and businesses to contact their CPA for information about their eligibility for these tax benefits