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The Economic Stimulus Act of 2008, which President Bush signed into law in February, has gained attention in the retail industry mostly for the rebate checks that many taxpayers are receiving.
However, what some companies may not know is that there are some provisions in the Act designed to stimulate corporate spending -- and some of these provisions may be particularly attractive to retailers that are planning on “green” implementation.
There are stipulations in the Economic Stimulus Act that provide accelerated “bonus” depreciation for businesses placing qualifying assets in service during the calendar year 2008. In addition to regular depreciation on these qualifying assets, businesses will be able to take an additional 50 percent of bonus depreciation during this period. This benefit is very similar to provisions provided to stimulate the economy in prior years, most notably the years following September 11, 2001.
To illustrate, assume a business places a $1 million asset with a five-year useful life in service on June 1, 2008. Under prior law, the business would have a depreciation expense of $200,000 for tax purposes. Under the provisions in the Economic Stimulus Act, the business will now have $600,000 of depreciation expense, comprised of $500,000 of bonus depreciation ($1 million x 50 percent) and $100,000 of regular depreciation ($500,000 remaining basis x 20 percent).
For retailers contemplating green initiatives, bonus depreciation is just one more incentive to go green in 2008. With many energy credits expiring at the end of the year (unless Congress elects to extend these provisions), now is the time to combine these credits with the bonus depreciation, to maximize potentially significant cash savings through green expenditures.
To illustrate the benefits of combining these provisions, assume a retailer places solar equipment in service during 2008 at a cost of $1 million (for simplicity’s sake, we’ll assume the equipment has a five-year useful life). Excluding any potential limitations, the property would be eligible for a 30 percent tax credit of approximately $300,000. The basis of the property would then be reduced by 50 percent of the credit ($150,000) to $850,000, and this amount would be eligible for depreciation under the Economic Stimulus Act.
As a result, the 50 percent bonus depreciation ($425,000) would be available, along with a regular depreciation of $85,000 ($425,000 x 20 percent). The resulting $510,000 ($425,000+$85,000) of depreciation value is then multiplied by 35 percent, which is the federal income tax rate that applies to most corporations, for a total depreciation savings of $178,500. Combining that with the $300,000 tax credit and the retailer saves a whopping $478,500.
In addition to the bonus depreciation, the Economic Stimulus Act increased the deduction limit to $250,000 up from $125,000 for certain asset write-off provisions. This increase phases out when total qualifying property placed in service exceeds a cost of $800,000. Therefore, this provision primarily impacts small and moderately-sized businesses with modest capital expenditure needs.
@bio:Catherine Fox-Simpson is a tax partner in the Retail and Consumer Product Practice at BDO Seidman, LLP in Dallas. She can be reached at [email protected].