May 4, 2008 - I am a small business owner struggling to manage through these difficult economic times. I recently heard that I might have the option to take increased deductions on equipment purchases this year. Is that true?

The courts, IRS, and Congress continue to churn out a high volume of tax developments that affect corporations and businesses, including key changes that may affect your enterprise.

Economic Stimulus Act. On Feb. 13, President Bush signed the "Economic Stimulus Act of 2008" into law. The centerpiece of the Stimulus Act, which was designed to bolster the sagging economy, was a rebate provision that puts extra cash into the hands of most Americans. However, the Act also included two important business changes:

Liberalized expensing. The Stimulus Act enhanced the option to currently deduct the cost of business machinery and equipment, instead of recovering its cost via depreciation over a number of years. It increased the amount that a business may expense from $128,000 to $250,000. The expensing election begins to phase out when a business buys more than a specified dollar amount of expensing eligible assets. The Stimulus Act increased this dollar amount from $510,000 to $800,000. Both changes enhance expensing as a tax option for more businesses and are in effect for tax years beginning in 2008.

Bonus first year depreciation. In addition to the usual depreciation deduction allowed for business property, the Stimulus Act permits businesses to take an extra "bonus" depreciation deduction for the first year new assets are placed in service. The bonus first-year depreciation deduction generally equals 50% of the cost of qualified property (most types of tangible property other than buildings and their structural components, improvements to certain types of leased property, and most software) acquired and placed in service during 2008. Certain types of property with a long life, and certain types of aircraft, may be placed in service before Jan. 1, 2010, and still qualify for the 50% bonus first year depreciation allowance.

Luxury auto depreciation limits for 2008. Under special "luxury automobile" rules, the otherwise available depreciation deductions for business autos, light trucks, and minivans are subject to additional dollar limits which vary year-to-year. The IRS has released the inflation-adjusted depreciation limits for business autos, light trucks and vans (including minivans) placed in service in 2008. For example, the first year dollar limit generally is $2,960 for autos and $3,160 for light trucks or vans first placed in service in 2008. For new vehicles first placed in service during 2008, the Stimulus Act increased the otherwise applicable first-year limit by $8,000-e.g., to $10,960 for autos and $11,160 for light trucks or vans.

Quicker deduction for payroll tax on bonuses and vacation pay. The IRS has allowed employers that use the accrual method of accounting and incur payroll taxes (Federal Insurance Contributions Act (FICA) tax and Federal Unemployment Tax Act (FUTA) tax) to take a deduction for bonuses and vacation pay in an earlier year than the year in which the amounts are paid in many cases. The IRS now allows these employers to use a specialized rule known as the recurring item accounting exception. In general, under this exception, taxpayers may be able to currently deduct certain recurring liabilities that they pay on or before the earlier of their tax return due date (including extensions), or the 15th day of the ninth calendar month after the close of the tax year. Thus, for example, if an employee earns $10,000 of vested vacation pay for services performed in 2008, and a calendar year corporation actually pays the compensation in February of 2009, the corporation may deduct the vacation pay, and the payroll tax related to that pay, on its 2008 return.

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