Provisions of the 2008 Economic Stimulus Tax Act

The 2008 Economic Stimulus Act was signed into law on Feb. 13, 2008 by President Bush. The new law affects a wide variety of taxpayers including law firms, attorneys, their staff, and their clients. It contains temporary tax incentives for law firms to make investments in their companies as well as provides individuals with tax relief in the form of tax rebates. This article discusses some key provisions contained in the new tax act.

Tax Provisions Under the New Tax Act

Increased Section 179 Expense Deduction

The new tax act increases both the Section 179 expense deduction limit as well as the investment amount at which the Section 179 deduction begins to phase out. The Section 179 expensing election is available to all law firms whether formed as a corporation, partnership, limited liability company, or sole proprietorship. These elections enable law firms to expense rather than depreciate up to a specified amount of the cost of new or used tangible personal property such as office equipment that was placed in service during the year in the law firm's trade or business. The portion of the cost that could not be expensed would be depreciated based on the asset's depreciable life. Before the change in law, the maximum annual expensing amount was $128,000 for tax years beginning in 2008. This amount increases to $250,000 under the new tax act for tax year 2008 only.

The maximum annual Section 179 expensing amount generally is reduced dollar-for-dollar by the cost of eligible property placed in service by law firms during the year in excess of a specified investment amount. Under prior law, the 2008 Section 179 expense deduction starts to phase out for every dollar of property placed in service in excess of $510,000. This investment amount increases to $800,000 under the new tax act for tax year 2008 only.

Return of 50% Bonus Depreciation

Bonus depreciation was first introduced and allowed in 2001 as part of the Job Creation and Worker Assistance Act. Among other items, one of the act's provisions allowed a retroactive, special bonus depreciation deduction to taxpayers who purchased qualified property that was placed in service in their trade or business after Sept. 10, 2001. There were two types of qualified property. One type was eligible for the 30% bonus depreciation, and the other type was eligible for the 50% bonus depreciation. The bonus depreciation generated from this act generally expired for property placed in service after 2004 with some transitional exceptions.

The new tax act allows law firms to claim an additional first-year depreciation deduction equal to 50% of the adjusted basis of qualified property that is placed in service in 2008 and 2008 only. As under the old law, the Section 179 expense would be taken first before the 50% bonus depreciation can be taken on the qualified property's remaining adjusted basis. This special depreciation deduction is allowed for both regular tax and Alternative Minimum Tax purposes. Law firms that do not want to take the additional first-year bonus depreciation can elect out by attaching a statement to their return indicating which class of property they elect not to claim bonus depreciation on. This election must be made by the due date (including extensions) for filing the law firm's 2008 federal income tax return.

To be eligible to claim the additional 50% bonus depreciation, the law firm must meet all of the following requirements:

1. The property must be:
2. • property to which the Modified Accelerated Cost Recovery System ('MACRS') rules apply with an applicable recovery period of 20 years or less;
   • water utility property;
   • computer software (other than custom-made software acquired in the purchase of a business); or
   • qualified leasehold improvement property. This type of property includes improvements made to the interior portion of a building that is nonresidential real property by a lessor or lessee pursuant to a lease. The improvement must be placed in service more than three years after the building was first placed in service (i.e., the building must be more than three years old). The lessor and lessee may not be related persons. Certain improvements do not qualify, such as those made to the internal structural framework of a building or to structural components benefiting a common area.
3. The original use of the property must begin with the law firm after Dec. 31, 2007 and before Jan. 1, 2009. Original use is the first use to which the property is put.
4. The property must be acquired by the law firm during 2008, but only if no binding written contract is in effect before Jan. 1, 2008. However, property acquired by the law firm under a binding written contract entered into in 2008 qualifies. For property manufactured, constructed, or produced by the law firm for its own use, the law firm must begin manufacturing, constructing, or producing the property during 2008.
5. The property must be placed in service before Jan. 1, 2009. An extended placed-in-service date of one year (i.e., to before Jan. 1, 2010) applies to certain property that has a recovery period of 10 years or longer and certain transportation property. The property must have an estimated production period exceeding one year and cost more than $1 million. Transportation property is tangible personal property used in the trade or business of transporting persons or property.

Law firms with a short tax year in 2008 can still claim 50% bonus depreciation as long as the above requirements are met. The Internal Revenue Service has issued new Form 4562-FY (and instructions) for 2007. Fiscal year law firms with tax years beginning in 2007 and ending in 2008 can use this form to claim the 50% bonus depreciation deduction for qualified property placed in service after Dec. 31, 2007.

Increase of First-Year Depreciation
Limit for Passenger Automobiles

Code Section 280F(a) imposes dollar limits on the depreciation deductions that a law firm can claim on 'passenger automobiles.' 'Passenger automobiles' include any four-wheeled vehicles manufactured primarily for use on public streets, roads, and highways that have an unloaded gross vehicle weight of 6,000 pounds or less. Under prior law, the first-year depreciation deductions for passenger automobiles and qualified trucks or vans placed in service in 2008 were $2,960, and $3,160 respectively as adjusted for inflation. The new act increases the first-year depreciation limits for these vehicles by $8,000, assuming they are eligible for the 50% bonus depreciation deduction.

To be eligible for the additional 50% depreciation deduction, the original use of the automobile must begin with the law firm after Dec. 31, 2007 and before Jan. 1, 2009; the automobile must be predominantly used (i.e., more than 50%) in the law firm's trade or business; and the automobile must be acquired and placed in service by the law firm before Jan. 1, 2009. If all of these requirements are met, the maximum 2008 depreciation deduction for the qualified 'passenger automobiles' and 'trucks or vans' that are placed in service in 2008 would be $10,960 and $11,160 respectively.

Cash Rebates for Eligible Individuals

In order to stimulate the U.S. economy, the new law provides for the issuance of rebate checks to most American taxpayers. The Internal Revenue Service will use information from a taxpayer's 2007 tax return to calculate the rebate. Maximum rebate amounts are $600 for individuals and $1,200 for married couples filing jointly, with an additional amount of $300 for each qualifying child (dependent children under age 17). There is no limit on the number of qualifying children who may be eligible for the rebate.

The amount of the rebate is limited based on a taxpayer's adjusted gross income. The rebate amount begins to phase out for individuals with adjusted gross income over $75,000 and married couples filing jointly with adjusted gross income over $150,000. The amount of the rebate, including rebates for qualifying children, is reduced by 5% of the amount of adjusted gross income above the threshold amounts. Therefore, for a single taxpayer with no children, the rebate will be zero if that individual's adjusted gross income is $87,000 or higher. A 2007 tax return must be filed in order to currently receive the cash rebate. Otherwise, the taxpayer will claim the rebate as a credit on his 2008 return. The taxpayers who aren't eligible for the rebates based on their 2007 tax returns but become eligible in 2008, can also claim the rebate credit on their 2008 tax return. However, taxpayers who were eligible for the rebates based on their 2007 tax return but would not be eligible based on their 2008 return (i.e., higher income), will not have to repay the rebates received.

Nonresident aliens, estates or trusts, and individuals for whom a dependency exemption is allowable on another taxpayer's return do not qualify for the rebate. In order to receive a rebate, the social security numbers of all qualifying individuals must be included on the 2007 tax return. Individual taxpayer identification numbers issued by the Internal Revenue Service are not eligible identification numbers for this purpose.

The taxpayers who have filed their 2007 tax return began receiving their cash rebates as early as May 2008.

The 2008 Economic Stimulus Act was signed into law on Feb. 13, 2008 by President Bush. The new law affects a wide variety of taxpayers including law firms, attorneys, their staff, and their clients. It contains temporary tax incentives for law firms to make investments in their companies as well as provides individuals with tax relief in the form of tax rebates. This article discusses some key provisions contained in the new tax act.

Tax Provisions Under the New Tax Act

Increased Section 179 Expense Deduction

The new tax act increases both the Section 179 expense deduction limit as well as the investment amount at which the Section 179 deduction begins to phase out. The Section 179 expensing election is available to all law firms whether formed as a corporation, partnership, limited liability company, or sole proprietorship. These elections enable law firms to expense rather than depreciate up to a specified amount of the cost of new or used tangible personal property such as office equipment that was placed in service during the year in the law firm's trade or business. The portion of the cost that could not be expensed would be depreciated based on the asset's depreciable life. Before the change in law, the maximum annual expensing amount was $128,000 for tax years beginning in 2008. This amount increases to $250,000 under the new tax act for tax year 2008 only.

The maximum annual Section 179 expensing amount generally is reduced dollar-for-dollar by the cost of eligible property placed in service by law firms during the year in excess of a specified investment amount. Under prior law, the 2008 Section 179 expense deduction starts to phase out for every dollar of property placed in service in excess of $510,000. This investment amount increases to $800,000 under the new tax act for tax year 2008 only.

Return of 50% Bonus Depreciation

Bonus depreciation was first introduced and allowed in 2001 as part of the Job Creation and Worker Assistance Act. Among other items, one of the act's provisions allowed a retroactive, special bonus depreciation deduction to taxpayers who purchased qualified property that was placed in service in their trade or business after Sept. 10, 2001. There were two types of qualified property. One type was eligible for the 30% bonus depreciation, and the other type was eligible for the 50% bonus depreciation. The bonus depreciation generated from this act generally expired for property placed in service after 2004 with some transitional exceptions.

The new tax act allows law firms to claim an additional first-year depreciation deduction equal to 50% of the adjusted basis of qualified property that is placed in service in 2008 and 2008 only. As under the old law, the Section 179 expense would be taken first before the 50% bonus depreciation can be taken on the qualified property's remaining adjusted basis. This special depreciation deduction is allowed for both regular tax and Alternative Minimum Tax purposes. Law firms that do not want to take the additional first-year bonus depreciation can elect out by attaching a statement to their return indicating which class of property they elect not to claim bonus depreciation on. This election must be made by the due date (including extensions) for filing the law firm's 2008 federal income tax return.

To be eligible to claim the additional 50% bonus depreciation, the law firm must meet all of the following requirements:

1. The property must be:
2. • property to which the Modified Accelerated Cost Recovery System ('MACRS') rules apply with an applicable recovery period of 20 years or less;
   • water utility property;
   • computer software (other than custom-made software acquired in the purchase of a business); or
   • qualified leasehold improvement property. This type of property includes improvements made to the interior portion of a building that is nonresidential real property by a lessor or lessee pursuant to a lease. The improvement must be placed in service more than three years after the building was first placed in service (i.e., the building must be more than three years old). The lessor and lessee may not be related persons. Certain improvements do not qualify, such as those made to the internal structural framework of a building or to structural components benefiting a common area.
3. The original use of the property must begin with the law firm after Dec. 31, 2007 and before Jan. 1, 2009. Original use is the first use to which the property is put.
4. The property must be acquired by the law firm during 2008, but only if no binding written contract is in effect before Jan. 1, 2008. However, property acquired by the law firm under a binding written contract entered into in 2008 qualifies. For property manufactured, constructed, or produced by the law firm for its own use, the law firm must begin manufacturing, constructing, or producing the property during 2008.
5. The property must be placed in service before Jan. 1, 2009. An extended placed-in-service date of one year (i.e., to before Jan. 1, 2010) applies to certain property that has a recovery period of 10 years or longer and certain transportation property. The property must have an estimated production period exceeding one year and cost more than $1 million. Transportation property is tangible personal property used in the trade or business of transporting persons or property.

Law firms with a short tax year in 2008 can still claim 50% bonus depreciation as long as the above requirements are met. The Internal Revenue Service has issued new Form 4562-FY (and instructions) for 2007. Fiscal year law firms with tax years beginning in 2007 and ending in 2008 can use this form to claim the 50% bonus depreciation deduction for qualified property placed in service after Dec. 31, 2007.

Increase of First-Year Depreciation
Limit for Passenger Automobiles

Code Section 280F(a) imposes dollar limits on the depreciation deductions that a law firm can claim on 'passenger automobiles.' 'Passenger automobiles' include any four-wheeled vehicles manufactured primarily for use on public streets, roads, and highways that have an unloaded gross vehicle weight of 6,000 pounds or less. Under prior law, the first-year depreciation deductions for passenger automobiles and qualified trucks or vans placed in service in 2008 were $2,960, and $3,160 respectively as adjusted for inflation. The new act increases the first-year depreciation limits for these vehicles by $8,000, assuming they are eligible for the 50% bonus depreciation deduction.

To be eligible for the additional 50% depreciation deduction, the original use of the automobile must begin with the law firm after Dec. 31, 2007 and before Jan. 1, 2009; the automobile must be predominantly used (i.e., more than 50%) in the law firm's trade or business; and the automobile must be acquired and placed in service by the law firm before Jan. 1, 2009. If all of these requirements are met, the maximum 2008 depreciation deduction for the qualified 'passenger automobiles' and 'trucks or vans' that are placed in service in 2008 would be $10,960 and $11,160 respectively.

Cash Rebates for Eligible Individuals

In order to stimulate the U.S. economy, the new law provides for the issuance of rebate checks to most American taxpayers. The Internal Revenue Service will use information from a taxpayer's 2007 tax return to calculate the rebate. Maximum rebate amounts are $600 for individuals and $1,200 for married couples filing jointly, with an additional amount of $300 for each qualifying child (dependent children under age 17). There is no limit on the number of qualifying children who may be eligible for the rebate.

The amount of the rebate is limited based on a taxpayer's adjusted gross income. The rebate amount begins to phase out for individuals with adjusted gross income over $75,000 and married couples filing jointly with adjusted gross income over $150,000. The amount of the rebate, including rebates for qualifying children, is reduced by 5% of the amount of adjusted gross income above the threshold amounts. Therefore, for a single taxpayer with no children, the rebate will be zero if that individual's adjusted gross income is $87,000 or higher. A 2007 tax return must be filed in order to currently receive the cash rebate. Otherwise, the taxpayer will claim the rebate as a credit on his 2008 return. The taxpayers who aren't eligible for the rebates based on their 2007 tax returns but become eligible in 2008, can also claim the rebate credit on their 2008 tax return. However, taxpayers who were eligible for the rebates based on their 2007 tax return but would not be eligible based on their 2008 return (i.e., higher income), will not have to repay the rebates received.

Nonresident aliens, estates or trusts, and individuals for whom a dependency exemption is allowable on another taxpayer's return do not qualify for the rebate. In order to receive a rebate, the social security numbers of all qualifying individuals must be included on the 2007 tax return. Individual taxpayer identification numbers issued by the Internal Revenue Service are not eligible identification numbers for this purpose.

The taxpayers who have filed their 2007 tax return began receiving their cash rebates as early as May 2008.