by Steve Kampa, Tax Manager
The IRS has released Rev. Proc. 2008-54 providing additional guidance on the depreciation provisions of the Economic Stimulus Act of 2008, including interaction with tax incentives provided in other legislation for GO Zone and Kansas Recovery Assistance (RA) property.
Section 179 General Provision. For tax years beginning in 2008, qualifying property is eligible for an increased §179 deduction of $250,000. The maximum deduction is reduced, dollar-for-dollar, by the amount of §179 property exceeding $800,000. For example, if a company purchases $900,000 of qualifying property, the maximum §179 deduction is $150,000.
For tax years beginning in 2009, the maximum §179 deduction will be $125,000 plus an inflation adjustment amount.
Passthrough Entities. A partner or S corporation shareholder in a business that operates on a fiscal year may not be able to take full advantage of the increased §179 deduction.
Example: An S corporation operates on a fiscal year beginning April 1, 2008 and ending March 31, 2009. The S corporation purchases a single item of §179 property at a cost of $250,000 and elects to expense the entire amount. The deduction is passed through to the company’s sole shareholder. However, because the company’s year ends in 2009 and the shareholder is a calendar year taxpayer, the shareholder must report all passthrough items on his 2009 tax return. The shareholder’s §179 deduction is therefore limited to the 2009 §179 cap of $125,000 as adjusted for inflation. However, the shareholder would be able to carry over the unused §179 deduction for up to five years.
GO Zone. Under special provisions of the Katrina Emergency Tax Relief Act of 2005 and the Small Business and Work Opportunity Tax Act of 2007, qualifying property purchased and placed in service in certain GO Zone areas is eligible for an additional §179 deduction of $100,000 and the reduction threshold amount is increased by $600,000. For tax years beginning in 2008, the maximum deduction for eligible property is therefore $350,000 and the reduction threshold begins at $1,400,000. The specified areas are:
- Louisiana parishes of Calcasieu, Cameron, Orleans, Plaquemines, St. Bernard, St. Tammany, and Washington
- Mississippi counties of Hancock, Harrison, Jackson, Pearl River, and Stone
Property not in the specified GO Zone areas is subject to the $250,000 and $800,000 limitations.
Kansas Disaster Area. Likewise, in coordination with provisions of the Food, Conservation, and Energy Act of 2008 (a/k/a the Farm Bill), the §179 deduction is $350,000 and the reduction threshold begins at $1,400,000 for Kansas RA property placed in service in a year beginning in 2008. The covered disaster area comprises:
- Kansas counties of Barton, Clay, Cloud, Comanche, Dickinson, Edwards, Ellsworth, Kiowa, Leavenworth, Lyon, McPherson, Osage, Osborne, Ottawa, Phillips, Pottawatomie, Pratt, Reno, Rice, Riley, Saline, Shawnee, Smith, and Stafford
Bonus depreciation. The Economic Stimulus Act also provides an additional first year 50% “bonus” depreciation allowance for new property purchased and placed in service in 2008. Before the Act, bonus depreciation was generally not available after 2004 except for qualifying GO Zone and Kansas RA property. Rev. Proc. 2008-54 clarifies that if any property is eligible for bonus depreciation under both the Economic Stimulus Act and other legislation (the Farm Bill, etc.), only one additional first-year depreciation allowance may be claimed.
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