NIFE

The Bailout Bill: Tax Changes Affecting Businesses

The Emergency Economic Stabilization Act of 2008, referred to by some as the "bailout bill," or, as others prefer to call it, the "rescue plan," was recently enacted in an attempt to help stabilize the turmoil in the U.S. economy. While a great deal of the attention has been focused on the bailout provisions of the Act, there are also significant tax law changes affecting businesses and corporations. Here are some of the most noteworthy.

Extension and modification of research and development credit

Anxiously awaited by many companies, the research tax credit--generally equal to 20% of the amount by which a taxpayer’s qualified research expenses for a taxable year exceed a base amount for that year--is extended through December 31, 2009.

In addition, the alternative simplified research credit increases from 12% to 14%, effective for tax years ending December 31, 2008. Further, the alternative incremental research credit is repealed for tax years beginning after December 31, 2008.

Extension of new markets tax credit

• Current law provides a tax credit for taxpayers who make a qualified equity investment in a qualified community development entity (CDE). This provision was set to expire December 31, 2008. EESA extends it through 2009.
• For 2009, up to $3.5 billion in qualified equity investments are permitted.

 Extension of other business tax credits

• The Indian employment tax credit is extended through December 31, 2009.
• The railroad track maintenance credit is extended to apply to expenditures paid or incurred before 2010. For tax years after 2007 and before 2010, it can be used to offset the AMT.
• The mine rescue training team credit is extended through December 31, 2009.

Extension and modification of business deductions: expenses

• The election to deduct certain environmental remediation costs is extended for expenditures paid or incurred in 2008 and 2009.
• The election to expense costs related to film and television productions is extended to 2009.
• The placed-in-service and construction requirements for the IRC Section 179C election to expense 50% of the cost of eligible qualified refinery property is extended two years to property placed-in-service through 2013. In addition, this deduction is also available to refineries processing liquid fuel directly from shale or tar sands, for property placed in service after October 3, 2008.
• The suspension of the percentage depletion limitation for oil and gas produced from marginal properties is extended to tax years beginning in 2009.
• The election to expense 50% of the cost of advanced mine safety equipment is extended for property placed in service in 2009.

Extension and modification of business deductions: depreciation

• The 15-year MACRS recovery period for qualified leasehold improvement property, restaurant improvements and buildings, and qualified retail improvement property is extended to apply to property placed in service in 2008 and 2009.
• Machinery or equipment (other than a grain bin, cotton ginning asset, fence, or land improvement) that is used in a farming business, where the original use of the machinery or equipment commences in 2009, is treated as 5-year property for purposes of claiming MACRS depreciation.
• The 7-year MACRS recovery period for motorsports entertainment complexes and related ancillary and support facilities is extended to property placed in service in 2008 and 2009.
• The MACRS recovery periods that apply to qualified Indian reservation property have been extended for two years through December 31, 2009.

Extension and modification of incentives for charitable giving

• The enhanced charitable deduction for corporate contributions of computer technology and/or equipment is extended for contributions made during any tax year beginning on or before December 31, 2009.
• The enhanced deduction for charitable donations of food inventory by noncorporate taxpayers that are engaged in a trade or business is extended for contributions made on or before December 31, 2009. The 10% limitation is temporarily eliminated for food contributions by certain farmers and ranchers.
• The enhanced deduction for corporate donations of book inventory to public schools is extended for contributions made on or before December 31, 2009.
• Current law provides that the amount of a shareholder's basis reduction in the stock of an S corporation by reason of a charitable contribution equals the shareholder's pro rata share of the property's adjusted basis. This provision is extended to apply to tax years beginning before January 1, 2010.

Modification of other business tax incentives

• The District of Columbia empowerment zone provisions are extended to apply in 2008 and 2009.
• Compensation from nonqualified deferred compensation plans maintained by offshore corporations will generally be taxable when it is not subject to substantial risk of forfeiture.

Changes to energy conservation incentives

• The placed in service date for the renewable electricity production credit is extended through December 31, 2009, in the case of wind and refined coal, and through December 31, 2010, in the case of other sources. The credit is also extended to facilities that generate electricity from marine renewables. Some definitions have been updated, and the rules for the refined coal credit have been modified.
• The 30% investment tax credit for solar energy property and qualified fuel cell property, and the 10% investment tax credit for microturbines are extended through 2016. A new 10% tax credit applies to combined heat and power systems and geothermal heat pumps. A new 30% tax credit applies to small wind energy property. Public utility property also becomes eligible for the credit. The $500 per half kilowatt of capacity cap for qualified fuel cells is increased to $1,500 per half kilowatt of capacity. These credits can be used to offset the alternative minimum tax (AMT) as well as the regular tax.
• The credit available to contractors for the construction or manufacture of new energy-efficient homes is extended through December 31, 2009.
• The credit allowed for the manufacture of energy-efficient dishwashers, clothes washers, and refrigerators is extended through 2010. Additionally, the standards that the manufactured appliances must meet for application of the credit have been modified.
• The advanced coal project investment credit is increased to 30%, and the IRS is authorized to allocate an additional $1.25 billion in credits to qualified projects that separate and sequester at least 65% of total carbon dioxide emissions.
• The coal gasification project credit is increased to 30%, and the IRS is authorized to allocate an additional $250 million in credits to qualified projects that separate and sequester at least 75% of total carbon dioxide emissions.
• A tax credit of $10 per metric ton is provided for carbon dioxide that is captured and transported from an industrial source for use in enhanced oil recovery. The credit is $20 per metric ton in the case of carbon dioxide captured and transported from an industrial source for permanent storage in a geologic formation.
• The deduction for costs associated with energy-efficient commercial building property is extended for five years.
• A 50% additional depreciation allowance can be claimed on the adjusted basis of qualified reuse and recycling property acquired and placed in service after August 31, 2008.
• A 10-year recovery period and 150% declining balance method is provided for any qualified smart electric meter and any qualified smart electric grid system.

Heartland, Hurricane Ike, and other disaster relief

A special five-year carryback period for net operating losses (NOLs) is created for qualified disaster losses.
A business can elect to expense qualified disaster expenses after 2007, rather than capitalizing them.
An additional 50% depreciation allowance can be claimed for real and personal business property that is purchased to rehabilitate or replace similar property that is destroyed or condemned as a result of a presidentially-declared disaster. The provision applies to property placed in service after December 31, 2007, with respect to disasters declared after that date and occurring before January 1, 2010.
The maximum IRC Section 179 expense allowance and investment limitation amount are both increased (by $100,000 and $600,000, respectively) for qualified IRC Section 179 disaster assistance property placed in service after 2007, with respect to disasters declared after 2007 and occurring before January 1, 2010.
The hiring period for eligibility for the Work Opportunity Tax Credit applicable to Hurricane Katrina employees is extended through August 25, 2009.
The increased percentages of 13% and 26% for claiming the rehabilitation credit on qualified rehabilitated buildings and certified historic structures in the Gulf Opportunity (GO) Zone is extended through December 31, 2009.
The tax-exempt bond rules and the increase in the low-income housing cap currently available in the Gulf Opportunity (GO) Zone are extended to areas hit by Hurricane Ike in 2008.
Many of the tax benefits extended to the victims of Hurricanes Katrina, Wilma, and Rita are modified and available for victims of the severe storms, tornados, and flooding that hit the "Midwestern Disaster Area" between May 20, 2008 and August 1, 2008. The "Midwestern Disaster Area" includes areas in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, and Wisconsin.

The bad news for businesses

The Act also contains some bad tax news for businesses:

• The limits on the IRC Section 199 domestic production activities deduction for oil-related production is decreased to 3% for tax years beginning after 2009 (currently, the deduction is 6% for various industries).
• The 6.2% FUTA tax rate (which includes a temporary 0.2% surcharge) is extended through 2009 (previously scheduled to be reduced to 6%). This payroll tax is paid for by the employer, not through employee deductions. The FUTA tax is assessed only on the first $7,000 of wages or salary paid to an employee for a year. 

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The information contained on this website and from any communication related to this website is for information purposes only. The National Institute of Financial Education (NIFE) does not hold itself out as providing any legal, financial or other advice. NIFE also does not make any recommendation or endorsement as to any investment, advisor or other service or product or to any material submitted by third parties or linked to this website. In addition, NIFE does not offer any advice regarding the nature, potential value or suitability of any particular investment, security or investment strategy. The material on this website does not constitute advice and you should not rely on any material in this website to make (or refrain from making) any decision or take (or refrain from making) any action.

(C) Forefield, Inc. - All Rights Reserved 2008

 

The Bailout Plan - Tax Impact to Individuals

The Emergency Economic Stabilization Act of 2008, referred to by some as the "bailout bill," or, as others prefer to call it, the "rescue plan," was recently enacted in an attempt to stabilize the turmoil in the U.S. economy. While a great deal of attention has been focused on the true bailout provisions of the Act, there are also a plethora of tax law changes affecting individual taxpayers. Here are some of the most noteworthy. Extension of mortgage debt forgiveness The Act extends for three additional years the exclusion from gross income for discharges of qualified principal residence indebtedness. The Mortgage Forgiveness Debt Relief Act of 2007 provided an exclusion for the discharge of up to $2 million ($1 million if married filing separately) of Qualified Principal Residence Indebtedness that applies to debts discharged from January 1, 2007 through December 31, 2009. The Act extends the end date to December 31, 2012. The exclusion applies to foreclosures, deed-in-lieu of foreclosures, or any loan modification. Note: "Qualified Principal Residence Indebtedness" is a debt incurred to acquire, construct, or substantially improve a principal residence. One-year "patch" for the alternative minimum tax (AMT) The 2008 AMT exemption amount for individuals is raised to $46,200 for singles, $69,950 for married couples filing jointly, and $34,975 for married couples filing separately. This is a one-year "patch." Absent further legislation, the AMT exemption amounts in 2009 will be $33,750 (single), $45,000 (married filing jointly), and $22,500 (married filing separately). The Act also modifies the way the AMT refundable credit is calculated, generally making it easier for individuals to utilize any AMT credit that is carried over from prior years. Additionally, the Act offers specific relief to individuals who were unable to pay AMT liability that resulted from the exercise of incentive stock options (ISOs) in prior years. Note: AMT exemption amounts are phased out for higher income taxpayers. For married couples filing jointly, phaseout starts when income exceeds $150,000. For unmarried individuals, the phase out threshold is $112,500, and for married individuals filing separately, the threshold is $75,000. New tax credit for electric vehicles The Act creates a new tax credit of $2,500 to $7,500 for plug-in electric vehicles. The credit will start to phase out for each manufacturer after 250,000 qualifying electric vehicles are sold. Vehicles that qualify will need to be certified under the Clean Air Act and meet low-emission standards. Higher tax credit amounts are also available for electric vehicles with gross vehicle weight ratings of more than 10,000 pounds. New tax-free fringe benefit for bicyclists The Act provides a new tax break for employees who commute by bicycle. Employers can provide a tax-free fringe benefit of up to $20 per month to cover "reasonable expenses incurred by the employee" for the purchase, improvement, repair, and storage of a bicycle that is regularly used to commute between the employee's home and office. This bicycle fringe benefit will begin in 2009. Extension and modification of energy tax credits The Act extends and modifies the energy efficient property credit through 2016, and allows the credit to offset AMT liabilities. The Act also removes the $2,000 maximum limit on solar electric property. Two new types of equipment are added that would qualify for the credit: wind energy equipment will produce a tax credit worth 30% of the cost of the equipment, with a maximum credit of $4,000, and geothermal heat pumps would qualify for a credit worth 30% of the cost, with a maximum credit of $2,000. The nonbusiness energy property credit is extended for property placed in service during 2009. This provides a credit of up to $500 for purchasing energy-saving products, such as windows, insulation, and HVAC systems. The Act also adds two new types of improvements that qualify for the credit: biomass fuel stoves with a thermal efficiency rating of 75% or more, and asphalt roofs with cooling granules. Other tax changes The Act modifies the child tax credit for 2008 by lowering the income threshold for the refundability of the credit from $12,050 to $8,500. The deduction for up to $250 of personal expenditures by teachers, counselors, and principals in K-12 schools for materials and supplies is extended for 2008 and 2009. This is an "above-the-line" deduction: you need not itemize to take this deduction. IRA owners who have reached age 70½--and who must therefore begin to withdraw money from their retirement accounts--can contribute up to $100,000 of directly to a qualified charity without having to include the distribution in income. This tax benefit is extended for 2008 and 2009, but is only available for individuals over age 70½ by the end of the year. The Housing and Economic Recovery Act of 2008 established a new real property tax standard deduction for non-itemizers. The maximum deduction is $1,000 for married couples filing jointly and $500 for all others. This deduction can’t exceed the amount of state and local real property taxes that you actually pay during the year. This deduction was originally for 2008 only. The Emergency Economic Stabilization Act of 2008 extends it through 2009. The optional itemized deduction for state and local sales taxes (in lieu of deducting state and local income taxes) is extended for 2008 and 2009. You must claim itemized deductions on Schedule A of Form 1040 to take this deduction. The deduction for up to $4,000 of college tuition and related fees is extended for 2008 and 2009. This above-the-line deduction allows married couples (filing jointly) with incomes of $130,000 or less ($65,000 for individuals) to deduct up to $4,000 in higher education expenses and those couples (filing jointly) earning $130,000 to $160,000 ($65,000 to $80,000 for individuals) to deduct up to $2,000. As it is an "above-the line" deduction, if you qualify, you need not itemize to take it. (c) Forefield, Inc. / KendallTodd, Inc.

2008 Year-End Tax Planning Tips

Despite passing three major pieces of tax legislation in the past year, Congress is still considering a host of expired and expiring provisions. While it's likely that several of these provisions will be renewed for the 2008 tax year, the uncertainty creates a challenging planning environment. With the window of opportunity for many tax-saving moves closing on December 31, it makes sense to focus on the basics, while staying ready to take advantage of any late-breaking legislative developments.

Timing is everything

Year-end tax planning is as much about the 2009 tax year as it is about the 2008 tax year. There's a real opportunity for tax savings when you can predict that you'll be paying taxes at a lower rate (for example, if your income will be significantly different) in one year than in the other. If that's the case, some simple year-end moves can pay off in a big way.

For example, you may be able to defer a year-end bonus, or delay the collection of business debts, rents, and payments for services. Similarly, you may be able to accelerate deductions into 2008 by paying some deductible expenses in December rather than in January.

Alternative minimum tax (AMT) facts

If you're subject to the AMT, traditional year-end maneuvers, like deferring income and accelerating deductions, can actually hurt you. The AMT--essentially a separate federal income tax system with its own rates and rules--effectively disallows a number of itemized deductions, making it a significant consideration when it comes to year-end moves. For example, if you're subject to the AMT in 2008, prepaying 2009 state and local taxes won't help your 2008 tax situation, but could hurt your 2009 bottom line.

Legislation signed into law in December 2007 brought the most recent in a long series of temporary "fixes" for the AMT, but this temporary fix (in the form of increased AMT exemption amounts) expired at the end of 2007. If Congress doesn't act, the number of taxpayers subject to AMT could reach 25.7 million in 2008 (Source: Joint Committee on Taxation, JCX-38-07, June 25, 2007). Congress is likely to take some action, but the specifics are uncertain, making it important to stay up-to-date on any new developments.

Don't overlook IRA and retirement plan opportunities

Traditional IRAs (assuming you qualify to make deductible contributions) and employer-sponsored retirement plans, such as 401(k) plans, allow you to contribute funds pretax, reducing your 2008 income. Contributions you make to a Roth IRA or Roth 401(k) aren't deductible, so there's no benefit for 2008, but qualified Roth distributions are completely free from federal income tax--making these retirement savings vehicles very appealing.

For 2008, the maximum amount you can contribute to an IRA has increased to $5,000, and you can contribute up to $15,500 to a 401(k) plan. If you're age 50 or older, you can contribute up to $6,000 to an IRA, and up to $20,500 to a 401(k). The window to make 2008 contributions to your 401(k) closes at the end of the year, while you can generally make 2008 contributions to your IRA until April 15, 2009.

If you qualify, consider whether it makes sense to convert some or all of your traditional IRA assets to a Roth IRA. Funds that you convert, to the extent the funds represent investment earnings and deductible contributions, are considered taxable income. Nevertheless, the potential future tax benefit could outweigh the current tax bill.

Expired provisions likely to be renewed

In addition to AMT relief, watch for action on other provisions that expired at the end of 2007, but are likely to be renewed, including:

• Election to take an itemized deduction for state and local sales tax in lieu of state and local income tax
• Above-the-line deduction for qualified tuition and related expenses
• Above-the-line deduction for certain expenses of elementary and secondary school teachers
• Tax-free distributions from IRAs for charitable purposes of up to $100,000 per person, per year

It's always difficult, at best, to anticipate what Congress will do. In an election year, it's even more unpredictable. If the last few years are any indication, though, it's not unreasonable to assume that we might see some legislation late in the year, so stay alert.

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Prepared by Forefield Inc. Copyright 2008 Forefield Inc.