Important Note:  This information is provided as a brief explanation of the Economic Stimulus Act.  Please consult with your accountant or tax advisor to see how this act can benefit your business.

New Law Provides Two Important Business Tax Breaks

By now, you've probably heard about the new federal law that will be providing tax rebates to qualified individuals, beginning in May. But the Economic Stimulus Act also includes valuable new tax breaks for businesses on qualifying equipment and vehicles that they purchase. Office furniture purchases qualify for these tax advantages.

On February 13, President Bush signed the Economic Stimulus Act of 2008, which contains the valuable rebates for individual taxpayers. In addition, the new law includes two significant business tax breaks in the form of bigger depreciation write-offs:

1.  Bigger Section 179 depreciation deductions are allowed for qualifying assets placed in service in tax years beginning in 2008.

Under the Section 179 deduction privilege, many small and medium-sized businesses can instantly depreciate most or all of the cost of qualifying new and used assets including Office Furniture in the year they are first placed in service.

2. First-year "bonus depreciation" of an extra 50 percent is allowed for certain assets.

Under first-year bonus depreciation, your business can immediately deduct half of the cost of a new asset including New Office Furniture if it is purchased and placed in service during calendar 2008. Then, you can write off the remaining cost with the Section 179 deduction (if available) and/or regular depreciation deductions over the asset's designated "recovery period."

Now for the details about the deduction amounts that can be claimed this year, the businesses that are eligible for the tax breaks, and the types of assets that qualify.

Section 179 Deduction Goes Up for One Year Only

The Economic Stimulus Act almost doubles the maximum Section 179 deduction -- but only for the 2008 tax year when the maximum write-off is increased to $250,000 (up from $128,000 before the new law). For 2009 to 2010, the maximum deduction will revert to $125,000 (plus inflation adjustments) unless Congress takes further action.

Under a phase-out rule, a business that buys a great deal of assets that would otherwise qualify for Section 179 deductions can lose part or all of its write-off. Specifically, the maximum Section 179 deduction for an affected business is reduced dollar for dollar by the amount of qualifying assets in excess of a threshold for the year. For tax years beginning in 2008, the phase-out threshold is increased to $800,000 (up from $510,000 before the new law).
The higher threshold means that many more medium-sized businesses will be eligible for Section 179 deductions for tax years beginning in 2008. For 2009 to 2010, however, the phase-out threshold will revert to only $500,000 (plus inflation adjustments) unless Congress acts to extend the higher amount.

Example 1: Let's say a small business adds $200,000 worth of new and used office furniture during its 2008 tax year. Under the expanded Section 179 deduction break, the company can write off the entire $200,000 on its 2008 business tax return, as long as the business still has positive taxable income after subtracting the Section 179 deduction. Before the new law, the company's Section 179 deduction would have been limited to only $128,000.

Example 2:  A medium-sized corporation adds $825,000 worth of new and used office furniture during its 2008 tax year. Under the liberalized Section 179 deduction rules for 2008, the company can write off $225,000 on this year's tax return ($250,000 maximum Section 179 deduction reduced by the $25,000 excess over the $800,000 phase-out threshold). Before the new law, the business would have been ineligible for any Section 179 deduction due to the phase-out rule.

First-Year Bonus Depreciation Is Back

You may remember the 50 percent first-year bonus deprecation, a valuable deduction that expired a few years ago. Thanks to the new law, it's back again but only for certain assets.

Under first-year bonus depreciation, your business can immediately deduct half of the cost of new office furniture if it is purchased and placed in service during calendar 2008. Then, you can write off the remaining cost with the Section 179 deduction (if available) and/or regular depreciation deductions over the furniture’s designated "recovery period."

The new law creates a real tax-saving windfall for small and medium-sized businesses that can take advantage of both the expanded Section 179 deduction privilege and 50 percent first-year bonus depreciation. Reason: They can combine these two breaks to offset a big chunk, or maybe all, of their taxable income for the year.

Needless to say, there are some ground rules. To be eligible for 50 percent first-year bonus depreciation, an asset must meet these three requirements:

Requirement 1:  Be "qualified property" (including "qualified leasehold improvement property"), which is defined below.

Requirement 2:  Be purchased new during calendar year 2008.
Used assets do not qualify.

Requirement 3:  Be placed in service by December 31, 2008, or by December 31, 2009 for certain long-lived assets (explained below).

To be qualified property, an asset must fit one of the following descriptions:
Property with a depreciation recovery period of 20 years or less. This category includes most types of tangible personal property used for business. Only new assets with one exception.

An asset is eligible for the 50 percent first-year bonus depreciation break only if its original use commences with the taxpayer after December 31, 2007. In other words, the asset must be new rather than used. A special exception applies to assets that are sold by a taxpayer and then leased back to the same taxpayer.