ECONOMIC STIMULUS ACT

On February 13, 2008, President Bush signed into law the Economic Stimulus Act. The bill is intended to provide a jump-start to the lagging U.S. economy. The new law includes two tax incentives that would allow a much bigger write-off for horses used in your business and other property purchased and placed in service during 2008.

Expensing Allowance. The first incentive would increase the Section 179 expensing allowance for horses purchased and placed into service in 2008 from $128,000 to $250,000. This expensing allowance applies to farm equipment and most other depreciable property. Once total purchases of horses, and other eligible depreciable property, during 2008 reach $800,000, the expense allowance goes down one dollar for each dollar spent on eligible property over $800,000.

To illustrate the expensing allowance, assume a horse business purchases $750,000 of depreciable property in 2008, including $650,000 for horses. That business can write off $250,000 on its 2008 tax return and depreciate the balance. If instead, purchases were $900,000, the expense allowance would go down by $100,000. In either case, the amount of the purchases not expensed may also be eligible for bonus depreciation, as explained below.

As with most tax provisions, certain restrictions and exceptions apply that may limit the ability of a horse business owner to enjoy the full benefit of Section 179 expensing. For instance, the Section 179 expense for the year may not exceed the aggregate amount of taxable income of the taxpayer for such taxable year which is derived from the active conduct by the taxpayer of any trade or business during such taxable year. The income does not have to come from the horse business, but can be income from any business or businesses the horse owners may have. Wages, salaries, and other compensation are also considered business income. If there is still not enough business income, the taxpayer in some instances may still take the deduction and carry certain qualifying expenses forward to future tax years.

Bonus Depreciation. The second incentive brings back 50% first-year bonus depreciation for horses and most other depreciable property purchased and placed in service during 2008. It does not apply to property that has a depreciation life of over 20 years. Also, as was the case when bonus depreciation was available in 2003 and 2004, the property must be new, meaning that the original use of the horse or other property must commence with the taxpayer.

For a horse to be eligible, it cannot have been used for any purpose before it is purchased. In the case of the horses, the IRS regulations give the following example:

On April 1, 2000, E acquires a horse to be used in E’s thoroughbred racing business. On October 1, 2003, F buys the horse from E and will use the horse in F’s horse breeding business. The use of the horse by E in its racing business prevents the original use of the horse commencing with F. Thus, F’s purchase price of the horse does not qualify for the additional first year depreciation deduction.

To illustrate bonus depreciation, assume that in 2008 a business pays $500,000 for a colt to be used for racing and $50,000 for other depreciable property, bringing total purchases to $550,000. The young colt had never been raced or used for any other purpose before the purchase. The business would be able to expense $250,000 (as explained above), deduct another $150,000 of bonus depreciation (50% of the $300,000 remaining balance), and take regular depreciation on the $150,000 balance.