Farmers and others in an active trade or business can elect to treat the cost of up to $250,000 of qualifying property purchased during 2008 as an expense (rather than as a depreciable capital expenditure). Congress has aggressively increased and extended the Section 179 deduction in recent years. Under current legislation, the Section 179 limit is scheduled to drop back to $133,000 for 2009 through 2010(with indexing). To qualify for Section 179 expensing, all of the following requirements be met:
• The property must be tangible personal property used in a trade or business.
• The property must be purchased; either new or used property can be expensed.
• For property acquired in like-kind exchanges, only the boot portion is eligible for expensing.
The Economic Stimulus Act of 2008 provides an additional first-year depreciation deduction equal to 50 percent of the adjusted basis, after Section 179 expensing, of qualifying property placed in service after December 31, 2007 and before January 1, 2009. This additional first-year or bonus depreciation is allowed for both regular and AMT tax purposes. To qualify for the additional first-year depreciation, the property must meet all five of the following requirements.
• The original use of the property must start with the taxpayer (property must be new).
• The property must be MACRS property with a recovery period of 20 years or less.
• The taxpayer must purchase the property or enter into a binding contract to purchase the property in 2008.
• The property generally must be placed in service in calendar year 2008.
• The taxpayer is not required to use the Alternative Depreciation System (ADS) for the property. A producer with orchards, vineyards, or groves who elected not to capitalize pre-production expenses is generally required to use ADS.
Make sure to check with your tax preparer to see how these rule changes can assist you in managing your tax liability.