Qualifying for the Expanded $250,000 Expensing Election in the Stimulus Package

The 2008 stimulus package provides for an immediate deduction of up to $250,000 for qualified small business taxpayers. The small business taxpayer is one who invests less than $1,050,000 in total capital purchases during the taxable year.

The expensing election applies to both new and used property. There are three principal qualification requirements.

• Investment Threshold. The small business taxpayer is classified as such in the statute based on the level of their capital purchases throughout the year. If the taxpayer invests less than $800,000, he is entitled to expense the first $250,000, and then calculate depreciation on the balance. For taxpayers who invest more than $800,000 during the taxable year, the expensing is phased out on a dollar per dollar basis resulting in complete elimination when the total capital investment exceeds $1,050,000 per year. The expensing deduction is calculated before depreciation with the non-expensed portion subject to normal depreciation rules.
  
• Taxable Income Limitation. The maximum amount that may be expensed is further limited to the amount of taxable income from any of the taxpayer’s active trades or businesses. Taxable income for this purpose is calculated before the expensing deduction itself, net operating loss carrybacks or carryforwards, and other losses suspended due to basis limitations or passive activity classifications. Any amount suspended under the taxable income limitation is carried over indefinitely. It is important to note that the taxable income limitation is calculated on the taxpayer’s combined trade or business income; it is not calculated on a per trade or business basis. Finally, wages paid to a taxpayer constitute trade or business income for the purpose of this calculation.
  
• Asset Qualification. In order to qualify for the expensing election, the asset must constitute property eligible for MACRS depreciation. MACRS depreciation is not available to assets used less than 50% for business and certain leased assets.