THE 2008 ECONOMIC STIMULUS PACKAGE
The 2008 Economic Stimulus Act has been created to rekindle spending activity in the private sector of the economy. One of the tenets of the bill was the revival of the first-year bonus depreciation on qualified property which entitles a business to an additional 50% depreciation of the cost of those qualified assets. Moreover, the 50% bonus depreciation allowance can be instituted in addition to any Code Section 179 expenses taken during the appropriate period.
What Does It Do?
The stimulus legislation enables all businesses to add a bonus depreciation of 50% of the cost of qualified property in the first year deduction for assets purchased and placed in service after December 31, 2007 and before January 1, 2009. In some cases, such as long-term construction projects, the placed-in-service date may be extended to January 1, 2010. The bonus depreciation is allowed only for tangible property for which the Modified Accelerated Cost Recovery System (MACRS) applies and is limited to a recovery period of twenty years or less. In some cases, certain qualified leasehold improvement property may be subject to the bonus depreciation; however, intangible property is generally exempt from the bonus depreciation allowance.
The Economic Stimulus Act has significant implications for cost segregation studies, since the cost of new facilities and equipment are subject to large increases in MACRS depreciation treatment. For example, land improvement property is typically depreciated over 15 years at an accelerated rate, thus 50% of its cost would
be depreciated in the first year in addition to the normal depreciation allowed on the balance of the asset value after the reduction of the bonus amount. As an example, consider a new paved parking lot valued at $100,000. It’s normal depreciation amount in year 1 (assuming a half-year convention) would be $5,000; however, due to the increase in the first-year deduction allowance, the depreciation would be $52,500.
As previously stated, to qualify for the bonus depreciation, the asset must have been purchased, constructed or fabricated after December 31, 2007 and placed in service before January 1, 2009; however two exceptions exist. First, if the property is a long-production-period property (i.e. the property has an estimated production period in excess of one year and a cost of more than $1 million), then it must be placed in service before January 1, 2010 to qualify. The second exception states that property can be qualified as a long-production-period property if its estimated production period is greater than two years; however, it is only eligible for the bonus depreciation to the extent of the adjusted basis attributable before January 1, 2009.
For property acquired after December 31, 2007 and placed in service before January 1, 2009 is eligible for the bonus depreciation as long as a written binding contract for the property’s acquisition was not in effect before January 1, 2008. In other words, a contract for the construction of a new facility or for the revision of an existing structure (including tenant improvements) could not have been executed prior to January 1, 2008 for the property to be deemed qualified property. However, the property doesn’t fail to qualify for the bonus depreciation if a contract for the acquisition of a component of the property is in effect prior to January 1, 2008.