March 6, 2008
The Economic Stimulus Act of 2008, passed in February, instructs the Treasury Department
to distribute "rebate" checks totaling some $100 billion to working-class families
across America. But one Texas Tech University tax expert says the act is about more
than sending checks to consumers.
Robert Ricketts, the Frank M. Burke Chair in Taxation at Texas Tech’s Rawls College of Business, said the package also includes tax cuts designed to jump-start the automobile industry and to encourage American businesses to buy new equipment this year.
Twenty years ago, Congress imposed limits on depreciation deductions in connection with cars – so-called "luxury automobiles" – taxpayers used in their business or on the job. Depreciation deductions allow taxpayers to use some of the money they would otherwise pay in taxes to reduce the cost incurred in purchasing that new car. The depreciation caps have fallen far behind the actual cost of a new "luxury" car in today’s dollars, Ricketts said.
For example, Ricketts says, the depreciation deduction available for purchase of a new car in 2008 would have been just more than $3,000 before passage of the stimulus bill. With an average tax rate of 20 percent, a deduction of this amount would save the taxpayer $600, or about 1.5 car payments in the year of purchase. The Economic Stimulus Act increases the maximum depreciation deduction for a newly purchased car in 2008 to just more than $11,000. At that 20 percent tax rate, this deduction reduces the average person’s tax bill by $2,200, or about five or six months of car payments in the year of purchase.
"This is quite an incentive to go out and buy a new car," said Ricketts. "Of course, you only get the deduction if you use the car for business, so for the average working Joe, the benefit doesn’t apply."
Ricketts says for businesses, the incentives created by the Stimulus Act are even more substantial – two new incentives for businesses to buy property other than real estate in 2008. First, the first-year expense election is increased from $128,000 to $250,000, meaning that a business can claim up to a quarter of a million dollars of new property acquisitions in 2008. Assuming a tax rate of 34 percent, this means that the government will reduce a company’s tax liability for 2008 by as much as $85,000 if it buys $250,000 or more of equipment this year.
A second benefit follows the same rationale. Under the "bonus depreciation" rules implemented in the stimulus bill, companies can claim additional depreciation deductions equal to 50 percent of the cost of new equipment purchases in 2008, not including real estate. Thus, businesses purchasing new equipment in 2008 can claim three levels of depreciation deductions, including regular depreciation.
To illustrate, a company buying $600,000 of new equipment in 2008 can claim a first-year deduction of $250,000. It can then deduct half of the remaining cost, or $175,000, as "bonus" depreciation, and it can claim regular depreciation deductions on the remaining $175,000. If the property has a five-year depreciable life, the regular depreciation deduction would be $35,000. Thus, the company’s total deduction related to the original equipment purchase would be $460,000. Assuming a 34 percent tax rate, this would reduce the company’s 2008 tax bill by $156,400, an amount that might well exceed the down payment required to buy the property.
"At $150 billion, the price tag on the stimulus package is certainly expensive," said Ricketts. "But for self-employed taxpayers who need a new car, or companies that are thinking of buying new equipment, the government wants to help you buy it this year. It remains to be seen just how much stimulus this package will really create."
CONTACT: Robert Ricketts, Rawls College of Business, Texas Tech University,
(806) 742-3180, or email@example.com.