Bailout Bill Tax Changes Affecting Business
November 18, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
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 Further, the alternative incremental research credit is repealed for tax years beginning after December 31, 2008.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 and modification of other business tax credits and deductions
- The Indian employment tax credit is extended through December 31, 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.
- 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.
Extension and modification of incentives for charitable giving
- 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.
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 IRC Section 45 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 Act expands the types of facilities qualifying for the credit to new biomass facilities and to those that generate electricity from marine renewables (e.g., waves and tides). The Act updates the definition of an open-loop biomass facility, the definition of a trash combustion facility, and the definition of a non-hydroelectric dam. The Act also increases emissions standards on the refined coal credit and removes its market value test.
- The 30% investment tax credit for solar energy property and qualified fuel cell property, as well as the 10% investment tax credit for microturbines, is extended through 2016. The Act increases the $500 per half kilowatt of capacity cap for qualified fuel cells to $1,500 per half kilowatt of capacity, and adds small commercial wind as a category of qualified investment. The Act also provides a new 10% investment tax credit for combined heat and power systems and geothermal heat pumps. The Act allows these credits to be used to offset the alternative minimum tax (AMT).
- 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.
Midwestern, 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 expense qualified disaster expenses after 2007, instead of capitalizing these costs
- 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.
- 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.
FUTA surtax
The Act also extends the current temporary additional 0.2% FUTA surtax through December 31, 2009.
Bail-Out Bill Tax Changes Affecting Individuals
November 6, 2008 by Jean Keener, CFP, CRPC, CFDS · Leave a Comment
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.