November 16 , 2008 - I read your article about the increase to the Sec. 179 deduction to allow businesses to deduct equipment purchased this year. Wasn’t there also a new "bonus depreciation" deduction?

The Economic Stimulus Act of 2008 became law in February and was intended to jump-start our economy primarily with the payment of tax rebates to individuals and families ranging from $300 to $1,200. The Act also contained tax incentives aimed at encouraging businesses to increase their investments in new equipment by the end of 2008. Small businesses can write off up to $250,000 of qualifying equipment purchases in 2008 under a one-year increase to the Sec. 179 deduction. In some cases a taxpayer's use of the Sec. 179 deduction may be limited. If so, the taxpayer may turn to "bonus depreciation" of 50% of the cost of certain investments in 2008. Here are the details.

The Act provides for bonus (accelerated) depreciation by allowing a bonus first-year depreciation deduction of 50% of the adjusted basis of qualified property placed in service after Dec. 31, 2007, and, generally, before Jan. 1, 2009. The basis of the property and the depreciation allowances in the year the property is placed in service and later years are appropriately adjusted to reflect the additional first-year depreciation deduction. The amount of the additional first-year depreciation deduction is not affected by a short taxable year. The taxpayer may elect out of additional first-year depreciation for any class of property for any taxable year.

The interaction of the additional first-year depreciation allowance with the otherwise applicable depreciation allowance may be illustrated as follows. Assume that in 2008 a taxpayer purchases new depreciable property and places it in service. The property's cost is $1,000 and it is 5-year property subject to the half-year convention. The amount of additional first-year depreciation allowed under the provision is $500. The remaining $500 of the cost of the property is deductible under the rules applicable to 5-year property. Thus, 20 percent, or $100, is also allowed as a depreciation deduction in 2008. Accordingly, the total depreciation deduction with respect to the property for 2008 is $600. The remaining $400 cost of the property is recovered under otherwise applicable rules for computing depreciation.

Bonus depreciation is allowed for AMT purposes as well as for regular tax purposes. Additionally, bonus depreciation is permitted only for: (1) property that has an applicable recovery period of 20 years or less, (2) water utility property, (3) non-custom-made computer software, and (4) qualified leasehold improvement property. Original use of the property must begin with the taxpayer after Dec. 31, 2007. Additionally, the placed-in-service cutoff date is extended for an additional year (i.e., before Jan. 1, 2010) for certain property with a recovery period of ten years or longer and certain transportation and aircraft property.

In another boost to business owners, the otherwise applicable "luxury auto" cap on first-year depreciation is increased by $8,000 for vehicles that qualify.

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