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There has been a great deal of hype about the Economic Stimulus Act of 2008. Whether or not this Act will actually work to stimulate the economy, here are the highlights of what it means to both individual and business taxpayers.
Individuals
You will receive a rebate check from the government of up to $600 for individual taxpayers and $1,200 for married couples, plus $300 for each dependent child under 17 years old. Of course, there are limitations. The rebates are phased out by 5 percent of the excess of adjusted gross income (AGI) more than $75,000 (to $87,000 if no children) for individuals, and $150,000 (to $174,000 if no children) for married taxpayers filing joint returns, based on your 2007 filed tax return. Checks should arrive in May/June of 2008.
Businesses
Businesses will receive increases in the section 179 expensing limit on 2008 purchases of capitalized tangible personal property (and certain leasehold improvements):
The first year depreciation deduction will be accelerated by 50 percent of the cost of capitalized tangible personal property (and certain leasehold improvements) acquired and placed in service during 2008. (Fictitiously call "bonus" depreciation—it does not actually increase total depreciation, it only accelerates the deduction). The bonus depreciation is computed on the net cost, after the section 179 depreciation deduction.
Important note: The first year's tax reduction is the result of accelerated depreciation deductions. It is not a permanent benefit, nor is it a bonus. The benefit will reverse, and taxes will be higher than normal over the remaining life of the 2008 assets. According to economists, as long as there is continued equipment investment, the accelerated tax benefit should yield a net, after tax, reduction in the cost of assets acquired. In addition, the money outlaid for the purchase of the equipment (net of the tax reduction) in the first year is less, reducing risk factors and cost of capital.
Will the cash effect of these one-time rebates and accelerated tax deductions act to stimulate the economy? Definition of "Stimulus": An action that elicits or accelerates a physiological or psychological activity. Will psychological benefits accelerate the country's confidence, personal spending, and business investment, and then ultimately stimulate the economy? Let's hope so.
MargolisBecker LLC is the business and management advisory firm specializing in the graphic arts industry offering services such as business valuations, mergers and acquisitions, turnaround management, auditing and tax compliance. The company has prepared the PIA/GATF Ratio study since 1960. If you have any comments or questions, you can reach Stuart Margolis or Brian Enverso at (610) 667-4310 or (888) 577-1717 or e-mail, smargolis@margolisbecker.com or benverso@margolisbecker.com
Individual Example| Joint return - if AGI is | $150,000 | $162,000 | $174,000 | $186,000 |
| Taxpayer rebate | $1,200 | $1,200 | $1,200 | $1,200 |
| If two dependent children | $600 | $600 | $600 | $600 |
| Phase-out | $0 | - $600 | - $1,200 | - $1,800 |
| Total rebate checks | $1,800 | $1,200 | $600 | $ 0 |
Business Example (Section 179) | 2007 | 2008 OLD | 2008 NEW |
|---|
| Expensing limit | $125,000 | $128,000 | $250,000 |
| Phase-out threshold — beginning | $500,000 | $510,000 | $800,000 |
| Phase-out threshold — end | $625,000 | $638,000 | $1,050,000 |
Depreciation Example | OLD | NEW |
|---|
| Yearly equipment purchases | $750,000 | $750,000 |
| Taxable income before depreciation of new equipment | $550,000 | $550,000 |
| Depreciation expense | | |
| 1st year maximum section 179 depreciation | $ 0 | $250,000 |
| 1st year Bonus depreciation | $ 0 | $250,000 |
| 1st year regular depreciation (7 years) | $107,142 | $35,714 |
| Taxable income | $442,858 | $14,286 |
| Fed and State taxes (using 40%) | $177,143 | $2,857 |
| 1st year tax reduction | | $174,286 |
author: By Stuart W. Margolis, CPA, MS and Brian L. Enverso, CPA, MS, CVA