On Feb. 13, President Bush signed into law the Economic Stimulus Act, which is intended to jump-start the lagging U. S. economy. It includes two tax incentives that allow a larger write- off for horses and other depreciable property that are purchased and placed into service in 2008. This should provide additional incentives for people to invest more in horses for showing, racing and breeding in their businesses.
* Incentive # 1 -- This incentive increases the so-called section 179 expensing allowed for horses purchased for $128,000 to $250,000 and placed in service in 2008. This expensing allowance also applies to farm equipment and other depreciable property. Note, however, that once total allowable purchases and depreciable property in 2008 reaches $800,000, the expense allowance goes down one dollar for each dollar spent on eligible property over that amount.
The section 179 expensing allowance is valuable for people in a horse business. It was almost lost in 1996 when the House of Representatives passed legislation taking it away from the horse industry. The American Horse Council convinced the Senate to remove this restriction before passing the final bill and the deduction was preserved. The expensing option has increased over the years and is now $250,000.
For example, assume a horse business purchases $750,000 worth of depreciable property in 2008, of which $650,000 is for horses. This business can write off $250,000 on its 2008 income tax return and depreciate the balance. If purchases were $900,000, the expense allowance would go down by $100,000. In either case, the amount of purchases not expensed may also be eligible for bonus depreciation, which was reinstated for 2008 in the new tax stimulus package.
* Incentive # 2 -- This incentive brings back 50 percent first-year bonus depreciation for horses and most other depreciable property purchased and placed in service in 2008. Bonus depreciation was first passed in 2002 as a way to stimulate the economy. It was phased out in 2004. It was a huge benefit to the horse industry in 2002-2004 and should be again.
Bonus depreciation does not apply to property that has a depreciation life over 20 years. Also, the property must be new, meaning that the original use of the horse or other property must begin with the purchaser for the property to be eligible.
Original use means the first use to which the property is put, whether or not that use corresponds to the use of the property by the purchaser. There is no limit on the amount of bonus depreciation that can be taken, as there is with the expense deduction.
To illustrate bonus depreciation, assume that in 2008 a business pays $500,000 for a colt to be used in racing and $50,000 for other depreciable property, bringing the 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, deduct another $150,000 of bonus deprecation (50 percent of the $300,000 remaining balance) and take regular depreciation on the $150,000 balance.
This information was provided by the American Horse Council in Washington, D.C. The council represents all segments of the horse industry and can be contacted at (202) 296-4031.
• Doug Householder's e-mail address is dh-horse @flash.net.
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