Scott E. Vincent
Vincent, Fontg & Hansen, L.L.C.
Kansas City

The Economic Stimulus Act of 2008 (“Stimulus Act”), signed by President Bush on February 13, 2008, provides refundable rebate credits for individuals and stimulus provisions designed to encourage businesses to make capital expenditures in 2008. Several key provisions are noted below, and taxpayers should consider acting on some provisions before Congress revisits the benefits.

Rebate Credits

The Stimulus Act provides a 2008 refundable recovery rebate credit to eligible individuals, including retirees receiving only Social Security income and disabled veterans and their survivors. Taxpayers should note that a 2007 return must be filed to receive this credit. The Treasury Department will be sending an advance rebate of this credit based on 2007 tax return information. The advance rebate will be sent to most taxpayers during 2008 by check or direct deposit. For taxpayers receiving the rebates, the amounts are not includible in gross income and do not otherwise affect their withholding for 2008.

Qualified taxpayers will receive a minimum credit of $300 for individuals and $600 for taxpayers filing a joint return. The maximum credit is $600 for individuals and $1,200 for joint filers. There is also an additional credit of $300 per child. These rebate credits will phase out for individuals with adjusted gross income over $75,000 and for joint filers with adjusted gross income over $150,000.

Higher Expensing Limits and Bonus First-Year Depreciation

The Stimulus Act also encourages businesses to purchase more capital goods and equipment in 2008 by boosting expensing and reinstituting 50% bonus first-year depreciation. The Stimulus Act significantly increases the § 179 expense deduction for otherwise depreciable property to $250,000 (previously $128,000). The initial phase-out level for the § 179 benefit is also increased from $510,000 to $800,000. These increases should encourage 2008 expenditures and also make the § 179 incentives available to significantly more businesses, due to the higher phase-out threshold. The Stimulus Act reinstitutes 50% bonus first-year depreciation for qualifying new assets purchased in 2008 with the intent to support an economic turn-around.

Passenger Autos and Heavy Sport Utility Vehicles – Act Now!

In addition to the reinstutued first-year bonus depreciation of 50%, the Stimulus Act increases the “luxury auto” cap on first year depreciation by $8,000 for vehicles that qualify. This combination will allow significant writeoffs for taxpayers who buy heavy sport utility vehicles (“SUVs”) in 2008 for use in their businesses. Notably, an energy bill introduced in the Senate as this article went to press would eliminate a portion of this tax windfall.

As noted above, the Stimulus Act generally allows taxpayers a § 179 current year expense for up to $250,000 of otherwise depreciable personal property used in the active conduct of a trade or business. Prior to the Stimulus Act, other Code provisions applied caps to the depreciation and § 179 expensing of “passenger autos.” For example, first year dollar caps for vehicles bought and placed in service in 2006 were $3,060 for passenger autos and $3,260 for light trucks or vans. The Stimulus Act will boost these dollar caps by $8,000, which should allow combined first-year expensing and depreciation of $11,060 for passenger autos and $11,260 for light trucks and vans (assuming the yet to be announced 2008 dollar caps are otherwise the same as prior years).

The Stimulus Act provides even more incentives with respect to “Heavy SUVs,” which includes vehicles with a gross vehicle weight (“GVW”) rating of more than 6,000 pounds. Heavy SUVs were already exempt from the luxury auto dollar caps because they do not fit the definition of a passenger auto under the Code. This loophole was partially closed in the American Jobs Creation Act of 2004 with a limit of $25,000 on the expensing of Heavy SUVs. Otherwise, Heavy SUVs used in a taxpayer’s business are depreciated under the regular rules that apply to five-year property (if rated at 14,000 pounds GVW or less).

As noted, for new qualified property placed in service in 2008, the Stimulus Act provides an additional 50% first-year depreciation deduction. Qualified property generally includes autos and trucks used in a taxpayer’s business. Note that if first year expensing is also taken under § 179, the expense amount is taken first, followed by the Stimulus Act additional 50% first-year depreciation allowance, and then followed by regular first-year (and subsequent year) depreciation, with each successive percentage applying to the remaining adjusted basis.

A Heavy SUV example recently published by various sources (RIA, Kiplinger Letter) shows the acceleration possible with the combination of the applicable provisions for taxpayers who buy new Heavy SUVs in 2008 and place them in service this year.

Example: A calendar year taxpayer buys a $50,000 heavy SUV in February of 2008 and uses it 100% for business this year. For 2008, he may write off $40,000 of the cost of the vehicle, as follows:

• $25,000 expensing deduction, plus

• $12,500 of bonus first year depreciation ($50,000 − $25,000 of expensing × .50 = $12,500), plus

• $ 2,500 of regular first-year depreciation ($50,000 − $25,000 of expensing − $12,500 bonus depreciation × .20 = $2,500.

Pending Legislation and Conclusions

As this article went to press, Democratic House leadership had introduced H.R. 5351, the “Renewable Energy and Energy Conservation Tax Act of 2008.” If enacted, this bill would eliminate first-year expensing and bonus depreciation, and apply the luxury auto depreciation and expensing limits for Heavy SUVs placed in service after enactment. Congress has previously considered similar bills to close the Heavy SUV loopholes, but these provisions have not been enacted. It will be interesting to see whether energy and environmental concerns will overcome the Congressional pressure to generally support the economy and specifically support the U.S. auto industry. Even if these provisions remain in place, it will also be interesting to see whether businesses continue acquiring Heavy SUVs to accelerate depreciation they would still otherwise receive in later years when faced with rising gas prices and transportation costs.