Small Business Taxes & ManagementTM--Copyright 2008, A/N Group, Inc.
The Emergency Economic Stabilization Act of 2008 extends a number of expired or expiring tax provisions, energy incentives along with disaster relief and some other provisions. While the Act contains mostly beneficial tax provisions, there are some negatives. Our discussion of the law will be broken down into several parts. As usual, there are a number of provisions of interest to only selected taxpayers (e.g., banks, coal miners, etc.). We will list, but not discuss, these provisions in the last installment.
Individuals--Alternative Minimum Tax
This is the most important change for most taxpayers. The new law provides that the individual AMT exemption amount for taxable years beginning in 2008 is (1) $69,950, in the case of married individuals filing a joint return and surviving spouses; (2) $46,200 in the case of other unmarried individuals; and (3) $34,975 in the case of married individuals filing separate returns. These amounts are a small increase over the 2007 amounts, about even with the inflation rate. The new law does not provide a solution, but only an increased "patch" for 2008. Without another patch, the exemptions will decrease to the old level in 2009. The exemptions for estates and trusts remains at $22,500 and that for corporations remains at $40,000.
The Act also provides that, for taxable years beginning in 2008, individuals can offset their entire regular tax liability and alternative minimum tax liability by the nonrefundable personal credits.
The Act also provides relief to taxpayers who may have exercised incentive stock options and not sold them before the end of the tax year in previous years. The Act provides that any underpayment of tax outstanding on the date of enactment which is attributable to the application of the minimum tax adjustment for incentive stock options (including any interest or penalty relating thereto) is abated. No tax which is abated is taken into account in determining the minimum tax credit.
For taxpayers with long-term unused credits, the Act increases the AMT refundable credit amount. Now, the refundable credit is the amount (not in excess of the long-term unused minimum tax credit for the tax year) equal to the greater of: (1) 50 percent of the long-term unused minimum tax credit for such tax year, or (2) the amount (if any) of the AMT refundable credit amount determined for the taxpayer's preceding tax year (determined without regard to Code Sec. 53(f)(2)).
Finally, the new law provides that the AMT refundable credit amount and the AMT credit for each of the first two taxable years beginning after December 31, 2007, are increased by one-half of the amount of any interest and penalty paid before the date of enactment on account of the application of the minimum adjustment for incentive stock options.
Individuals--Income and Gains
Exclusion of Discharge of Acquisition Debt on Principal Residence
Gross income generally includes income realized by a debtor from the discharge of indebtedness. An exclusion from gross income is provided for any discharge of indebtedness income by reason of a discharge (in whole or in part) of qualified principal residence indebtedness. Qualified principal residence indebtedness means acquisition indebtedness (within the meaning of Section 163(h)(3)(B), except that the dollar limitation is $2,000,000) with respect to the taxpayer's principal residence. The basis of the individual's principal residence is reduced by the amount excluded from income under the provision. This rule was enacted in early 2008 and was to expire December 31, 2009. The new law extends the exclusion for discharges on or after January 1, 2010 and before January 1, 2013.
Bicycle Commuting Reimbursement Fringe Benefit
The provision adds a qualified bicycle commuting reimbursement fringe benefit as a qualified transportation fringe benefit to the parking, transit passes, and vanpool benefits. A qualified bicycle commuting reimbursement fringe benefit is any employer reimbursement during the 15-month period beginning with the first day of such calendar year of an employee for reasonable expenses incurred by the employee during the calendar year for the purchase and repair of a bicycle, bicycle improvements, and bicycle storage, provided that the bicycle is regularly used for travel between the employee's residence and place of employment.
The maximum amount that can be excluded from an employee's gross income for a calendar year for a bicycle commuting reimbursement fringe benefit is the applicable annual limitation for the employee for that calendar year. The applicable annual limitation for an employee for a calendar year is equal to the product of $20 multiplied by the number of the employee's qualified bicycle commuting months for the year. The $20 amount is not indexed for inflation. A qualified bicycle commuting month is any month for which the employee does not receive any other qualified transportation fringe benefit and during which the employee regularly uses a bicycle for a substantial portion of travel between the employee's residence and place of employment. Thus, no amount is credited towards an employee's applicable annual limitation for any month in which an employee's usage of a bicycle is infrequent or constitutes an insubstantial portion of the employee's commute.
A bicycle commuting reimbursement fringe benefit cannot be funded by an elective salary contribution on the part of an employee.
The provision is effective for taxable years beginning after December 31, 2008.
Qualified Charitable Distributions from IRAs
For 2006 and 2007 a taxpayer 70-1/2 or older could make a charitable contribution from his or her IRA of up to $100,000 without recognizing income and without taking a charitable deduction. The provision applied to traditional, Roth, inherited, or deemed IRAs. The distributions must have otherwise qualified as includible in income and as a deductible charitable contribution. The distribution counts as part of a taxpayer's minimum required distribution for the year.
The Act extends this provision to distributions made in 2008 and 2009.
Tax Tip--For taxpayers making substantial (and sometimes even small) charitable contributions, this option can provide substantial tax savings. Using the conventional approach and taking a distribution and reporting it as income first results in an increase in your AGI which can have a number of effects (e.g., reducing the availability of the $25,000 rental real estate deduction). In addition, large charitable contributions can be subject to restrictions. Using this provision avoids these tax drawbacks. Caution. Be sure to check the rules and work through the numbers before executing such a contribution.
Deduction of State and Local General Sales Taxes
The Act extends for two years, through December 31, 2009, the provision allowing taxpayers to elect to deduct State and local sales taxes in lieu of State and local income taxes.
Tax Tip--This provision generally only benefits taxpayers in states with low or no income taxes. But it can also be useful for taxpayers in odd situations where they've made large purchases during the year, didn't make estimated state tax payments, etc. Most software programs will do the calculation almost automatically.
Above-the-Line Deduction for Higher Education Expenses
An individual is allowed an above-the-line deduction for qualified tuition and related expenses for higher education paid by the individual during the taxable year. Qualified tuition and related expenses are defined in the same manner as for the Hope and Lifetime Learning credits, and includes tuition and fees required for the enrollment or attendance of the taxpayer, the taxpayer's spouse, or any dependent of the taxpayer with respect to whom the taxpayer may claim a personal exemption, at an eligible institution of higher education for courses of instruction of such individual at such institution. The maximum deduction is $4,000, subject to a phase-out for individuals with an AGI in excess of certain thresholds. The provision was set to expire at the end of 2007.
The Act extends the qualified tuition deduction for two years so that it is generally available for taxable years beginning before January 1, 2010. However, the provision also modifies the qualified tuition deduction so that it is unavailable to any taxpayer for any taxable year beginning in 2008 or 2009 if the taxpayer would, in the absence of the alternative minimum tax, have a lower tax liability for that year if he or she elected the Hope or Lifetime Learning credit with respect to an eligible individual instead of the qualified tuition deduction.
Educator Expense Deduction
Unreimbursed employee business expenses generally are deductible only as an itemized deduction and only to the extent that the individual's total miscellaneous deductions (including employee business expenses) exceed two percent of adjusted gross income.
Eligible educators are allowed an above-the-line deduction for certain expenses. Specifically, for taxable years beginning after December 31, 2001, and prior to January 1, 2008, an above-the-line deduction is allowed for up to $250 annually of expenses paid or incurred by an eligible educator for books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used by the eligible educator in the classroom. This provision was to expire at the end of 2007.
The new law extends the deduction for two years so that it is available for taxable years beginning before January 1, 2010.
Additional Standard Deduction for State and Local Real Property Taxes
An individual taxpayer's standard deduction for a taxable year beginning in 2008 is increased by the lesser of (1) the amount allowable to the taxpayer as a deduction for State and local taxes described in Section 164(a)(1) (relating to real property taxes), or (2) $500 ($1,000 in the case of a married individual filing jointly). The increased standard deduction is determined by taking into account real estate taxes for which a deduction is allowable to the taxpayer under Section 164 and, in the case of a tenant-stockholder in a cooperative housing corporation, real estate taxes for which a deduction is allowable to the taxpayer under Section 216. No taxes deductible in computing adjusted gross income are taken into account in computing the increased standard deduction. This provision was to be in effect for just the year 2008.
The Act extends the additional standard deduction for state and local property taxes for one year, making it applicable to taxable years beginning in 2009.
Tax Tip--This won't provide much if any benefit to young homeowners since the mortgage interest deduction almost always boosts their itemized deductions over the standard deduction threshold. However, taxpayers in states with lower or no income taxes and those with little or no mortgage interest will benefit.
Energy Incentives for Individuals
Residential Energy Property Credit
Code Section 25C provided a 10-percent credit for the purchase of qualified energy efficiency improvements to existing homes. A qualified energy efficiency improvement is any energy efficiency building envelope component that meets or exceeds certain criteria established by the 2000 International Energy Conservation Code and (1) that is installed in or on a dwelling located in the United States; (2) owned and used by the taxpayer as the taxpayer's principal residence; (3) the original use of which commences with the taxpayer; and (4) such component reasonably can be expected to remain in use for at least five years. The credit is nonrefundable. This Section expired for 2008. The new law reinstates it only for the year 2009.
Building envelope components are: (1) insulation materials or systems which are specifically and primarily designed to reduce the heat loss or gain for a dwelling; (2) exterior windows (including skylights) and doors; and (3) metal roofs with appropriate pigmented coatings which are specifically and primarily designed to reduce the heat loss or gain for a dwelling.
Additionally, Section 25C provides specified credits for the purchase of specific energy efficient property. The allowable credit for the purchase of certain property is (1) $50 for each advanced main air circulating fan, (2) $150 for each qualified natural gas, propane, or oil furnace or hot water boiler, and (3) $300 for each item of qualified energy efficient property.
Qualified energy-efficient property includes (1) an electric heat pump water heater, (2) an electric heat pump which has (3) a central air conditioner with certain minimum energy efficiency and (5) a natural gas, propane, or oil water heater which has a minimum energy factor. Geothermal heat pumps are now included under Section 25D (see below). Under Section 25C, the maximum credit for a taxpayer with respect to the same dwelling for all taxable years is $500, and no more than $200 of such credit may be attributable to expenditures on windows.
The Act reestablishes the credit for one year, for property placed in service after December 31, 2008 and before January 1, 2010. The provision also adds biomass fuel property to the list of qualified energy efficient building property eligible for a $300 credit. Biomass fuel property is a stove that burns biomass fuel to heat a dwelling unit located in the United States and used as a principal residence by the taxpayer, or to heat water for such dwelling unit, and that has a thermal efficiency rating of at least 75 percent. Biomass fuel is any plant-derived fuel available on a renewable or recurring basis, including agricultural crops and trees, wood and wood waste and residues (including wood pellets), plants (including aquatic plants, grasses, residues, and fibers).
Building envelope component now includes an asphalt roof containing appropriate cooling granules meeting the Energy Star program requirements. The credit is equal to 10 percent of the qualifying cost of the roof. It appears that property placed in service after October 3, 2008 will meet the requirement. However, this could be changed by any technical corrections act to conform to the other dates. The credit for geothermal heat pumps is eliminated to conform with the establishment of a residential geothermal heat pump credit under Code section 25D. See below.
Residential Alternative Energy Credit
The new law extends the residential alternative energy credit for eight years, through 2016. The new law generally increases the amount of the credit and adds small wind energy property to the types of property qualifying for the credit. All qualifying property is eligible for a 30-percent credit, subject to certain maximum amounts. Qualifying property now includes:
Geothermal heat pump property uses the ground or ground water as a thermal energy source to heat or cool a residential dwelling unit. It must meet certain energy requirements. Beginning in 2008, 30 percent of the expenditures for such property qualify for the credit with an annual maximum credit of $2,000.
Qualified small wind energy property generates electricity from a wind turbine, but does not include property that qualifies under Sec. 45 as a wind facility. The credit maximum is $500 for each half kilowatt of capacity, but not more than $4,000 annually and applies to property placed in service in tax years 2008 through 2016. Special rules apply to residences occupied by two or more taxpayers.
For solar electric property placed in service after December 31, 2008, the credit cap of $2,000 no longer applies. The credit is equal to 30 percent of qualifying property with no maximum.
These credits can be used against both the regular and alternative minimum tax through 2008. For tax years after 2008, the credit can be offset against the excess of both the regular and AMT liabilities in excess of the sum of certain other credits. Unused credits (reduced by all refundable credits except the energy credits) can now be carried forward.
Tax Tip--Under prior law the credits were less than generous. In the case of solar electric property, the credit would offset only a small portion of the total cost, which could range from $20,000 to over $35,000, depending on a number of factors. Now, a 30-percent credit on a $30,000 system would result in $9,000 of federal tax credits. You may also be entitled to rebates from your local utility and rebates and/or state tax credits. More than likely, in the best locations, such systems are now economically practical and your payback period would certainly be reasonable. The investment in wind property is also much more attractive then before, but whether or not it's economically practical will depend on the winds in your area.
Tax Tips--The property under this section must be installed in a dwelling unit used by the taxpayer. The Residential Energy Property Credit only applies to property installed in your principal residence.
Alternative Motor Vehicle Credit and Plug-In Electric
A credit is available for each new qualified fuel cell vehicle, hybrid vehicle, advanced lean burn technology vehicle, and alternative fuel vehicle placed in service by the taxpayer during the taxable year. In general, the credit amount varies depending upon the type of technology used, the weight class of the vehicle, the amount by which the vehicle exceeds certain fuel economy standards, and, for some vehicles, the estimated lifetime fuel savings. The credit generally is available for vehicles purchased after 2005. The credit terminates after 2009, 2010, or 2014, depending on the type of vehicle.
The Act modifies the alternative motor vehicle credit by treating the nonbusiness portion of that credit as a personal credit. As a result, in the event Congress extends the provision allowing personal credits to offset the alternative minimum tax, the alternative motor vehicle credit will be allowable against the alternative minimum tax.
The Act allows a credit for each qualified plug-in electric drive motor vehicle placed in service. A qualified plug-in electric drive motor vehicle is one that meets certain emissions standards and is propelled to a significant extent by an electric motor that draws electricity from a battery that (1) has a capacity of at least four kilowatt-hours and (2) is capable of being recharged from an external source of electricity. Qualified vehicles must have a gross weight of less than 14,000 pounds. In addition, qualified vehicles weighing less than 8,500 pounds must be passenger automobiles or light trucks. The base amount of the plug-in electric drive motor vehicle credit is $3,000.
In general, the credit is available to the vehicle owner, including the lessor of a vehicle subject to lease. If the qualified vehicle is used by certain tax-exempt organizations, governments, or foreign persons and is not subject to a lease, the seller of the vehicle may claim the credit so long as the seller clearly discloses to the user in a document the amount that is allowable as a credit.
Refundable Child Tax Credit
The law provides a credit for each qualifying child ($1,000) to taxpayers whose AGI is below the threshold. If the credit exceeds the taxpayer's liability, the excess amount is refundable, up to 15 percent of the taxpayer's earned income in excess of $12,050 for 2008 (indexed for inflation).
The Act modifies the earned income formula for the determination of the refundable child credit to apply to 15 percent of earned income in excess of $8,500 for taxable years beginning in 2009.
Definition of Qualifying Child
The new law makes several changes with respect to the definition of a qualifying child.
First, for purposes of the child tax credit, a qualifying child must be the taxpayer's dependent.
Second, with respect to the "tie-breaker" rules, the Act makes two clarifications. First, the tie-breaker rules apply whenever the two or more taxpayers can claim the child. In addition, if the parents can claim the child, but neither one does so, another taxpayer claiming the credit must have an AGI higher than the highest AGI of either of the child's parents.
Third, the age test now requires that the qualifying child be younger than the taxpayer claiming the credit and a qualifying child cannot file a joint return with a spouse in the year the taxpayer claims the child. There is an exception if the only reason for filing a joint return is for the child to obtain a refund.
Individuals--Broker Reporting of Customer's Basis in Securities Transactions
Section 6045(a) requires brokers to file with the IRS annual information returns showing the gross proceeds realized by customers from various sale transactions. The IRS is authorized to require brokers to report additional information related to customers.
Under the new law, every broker that is required to file a return under Section 6045(a) reporting the gross proceeds from the sale of a covered security must include in the return (1) the customer's adjusted basis in the security and (2) whether any gain or loss with respect to the security is long-term or short-term (within the meaning of Section 1222). This is similar to the reporting currently done by mutual funds.
A covered security is any specified security acquired on or after an applicable date if the security was (1) acquired through a transaction in the account in which the security is held or (2) was transferred to that account from an account in which the security was a covered security, but only if the transferee broker received a statement under Section 6045A (described below) with respect to the transfer. Under this rule, certain securities acquired by gift or inheritance are not covered securities.
A specified security is any share of stock in a corporation (including stock of a regulated investment company); any note, bond, debenture, or other evidence of indebtedness; any commodity or a contract or a derivative with respect to the commodity if the Secretary determines that adjusted basis reporting is appropriate; and any other financial instrument with respect to which the Secretary determines that adjusted basis reporting is appropriate. For stock in a corporation (other than stock for which an average basis method is permissible under section 1012), the applicable date is January 1, 2011. For any stock for which an average basis method is permissible under section 1012, the applicable date is January 1, 2012. Consequently, the applicable date for certain stock acquired through a periodic stock investment plan (for which stock additional rules are described below) and for stock in a regulated investment company is January 1, 2012. A regulated investment company is permitted to elect to treat as a covered security any stock in the company acquired before January 1, 2012. This election is described below. For any specified security other than stock in a corporation or stock for which an average basis method is permitted, the applicable date is January 1, 2013, or a later date determined by the IRS.
The customer's adjusted basis required to be reported to the IRS is determined under the following rules. The adjusted basis of any security other than stock for which an average basis method is permissible under Section 1012 is determined under the first-in, first-out method unless the customer notifies the broker by means of making an adequate identification (under the rules of Section 1012 for specific identification) of the stock sold or transferred. The adjusted basis of stock for which an average basis method is permissible under Section 1012 is determined in accordance with the broker's default method under Section 1012 (that is, the first-in, first-out method, the average cost method, or the specific identification method) unless the customer notifies the broker that the customer elects another permitted method. This notification is made separately for each account in which stock for which the average cost method is permissible is held and, once made, applies to all stock held in that account. As a result of this rule, a broker's basis computation method used for stock held in one account with that broker may differ from the basis computation method used for stock held in another account with that broker.
For any sale, exchange, or other disposition of a specified security after the applicable date (defined previously), the provision modifies Section 1012 so that the conventions prescribed by regulations under that section for determining adjusted basis (the first-in, first-out, specific identification, and average basis conventions) apply on an account-by-account basis. Under this rule, for example, if a customer holds shares of the same specified security in accounts with different brokers, each broker makes its adjusted basis determinations by reference only to the shares held in the account with that broker, and only shares in the account from which the sale is made may be identified as the shares sold. Unless the election described next applies, any stock for which an average basis method is permissible under Section 1012 which is acquired before January 1, 2012 is treated as a separate account from any such stock acquired on or after that date. A consequence of this rule is that if adjusted basis is being determined using an average basis method, average basis is computed without regard to any stock acquired before January 1, 2012. A regulated investment company, however, may elect (at the time and in the form and manner prescribed by the Secretary), on a stockholder-by-stockholder basis, to treat as covered securities all stock in the company held by the stockholder without regard to when the stock was acquired. When this election applies, the average basis of a customer's regulated investment company stock is determined by taking into account shares of stock acquired before, on, and after January 1, 2012. A similar election is allowed for any broker holding stock in a regulated investment company as a nominee of the beneficial owner of the stock.
The provision generally eliminates the present-law regulatory exception from Section 6045(a) reporting for certain options.
The provision changes to February 15 the present-law January 31 deadline for furnishing certain information statements to customers. The statements to which the new February 15 deadline applies are (1) statements showing gross proceeds (under Section 6045(b)) or substitute payments (under Section 6045(d)) and (2) statements with respect to reportable items (including, but not limited to, interest, dividends, and royalties) that are furnished with consolidated reporting statements (as defined in regulations).
The provision generally takes effect on January 1, 2011. The change to February 15 of the present-law January 31 deadline for furnishing certain information statements to customers applies to statements required to be furnished after December 31, 2008.
Qualified Restaurant and Leasehold Improvement Property
Generally, depreciation allowances for improvements made on leased property are determined under MACRS, even if the MACRS recovery period assigned to the property is longer than the term of the lease. This rule applies regardless of whether the lessor or the lessee places the leasehold improvements in service. If a leasehold improvement constitutes an addition or improvement to nonresidential real property already placed in service, the improvement generally is depreciated using the straight-line method over a 39-year recovery period, beginning in the month the addition or improvement was placed in service. However, exceptions exist for certain qualified leasehold improvements and qualified restaurant property.
Section 168(e)(3)(E)(iv) provides a statutory 15-year recovery period for qualified leasehold improvement property placed in service before January 1, 2008. Qualified leasehold improvement property is recovered using the straight-line method and a half-year convention. Leasehold improvements placed in service in 2008 and later will be subject to the general rules described above.
Qualified leasehold improvement property is any improvement to an interior portion of a building that is nonresidential real property, provided certain requirements are met. The improvement must be made under or pursuant to a lease either by the lessee (or sublessee), or by the lessor, of that portion of the building to be occupied exclusively by the lessee (or sublessee). The improvement must be placed in service more than three years after the date the building was first placed in service. Qualified leasehold improvement property does not include any improvement for which the expenditure is attributable to the enlargement of the building, any elevator or escalator, any structural component benefiting a common area, or the internal structural framework of the building.
If a lessor makes an improvement that qualifies as qualified leasehold improvement property, the improvement does not qualify as qualified leasehold improvement property to any subsequent owner of such improvement. An exception to the rule applies in the case of death and certain transfers of property that qualify for non-recognition treatment.
Section 168(e)(3)(E)(v) provides a statutory 15-year recovery period for qualified restaurant property placed in service before January 1, 2008. For purposes of the provision, qualified restaurant property means any improvement to a building if such improvement is placed in service more than three years after the date such building was first placed in service and more than 50 percent of the building's square footage is devoted to the preparation of, and seating for on-premises consumption of, prepared meals. Qualified restaurant property is recovered using the straight-line method and a half-year convention. Restaurant property placed in service in 2008 and later will be subject to the general rules described above.
The new law extends the 15-year recovery period for qualified leasehold improvements and qualified restaurant property for two years through December 31, 2009. Thus, property that meets the requirements and placed in service on or before December 31, 2009 qualifies.
Qualified Retail Improvement Property
The new law creates another class of property that qualifies for a 15-year recovery period. Qualified retail improvement property is any improvement to an interior portion of a building which is nonresidential real property if:
Improvements by a lessee or owner of the building qualify. (But improvements by an owner remain qualified only so long as the improvements are held by the owner.) Qualified property does not include an expenditure for the enlargement of the building, any elevator or escalator, any structural component benefitting a common area, or the internal structural framework of the building.
Qualifying property is excluded for bonus depreciation. The property does not qualify for the Section 179 expense option. Only property placed in service in 2009 qualifies. The property qualifies for the half-year convention.
Tax Tip--This addition greatly expands the availability of a 15-year recovery period to property owners. Were it not for this provision (and the ones for qualified restaurant property and qualified leasehold improvements), such capital expenditures would have to be recovered over 39 years--more than twice as long. The provision is not elective; however, you can elect out of it. The small window (only property placed in service in 2009 qualifies) means you want to plan carefully.
Farming Business Machinery and Equipment
Farm machinery and equipment generally has a 7-year recovery period. Under the new law, new (not used) machinery and equipment placed in service in a farming business in 2009 will have a recovery period of 5 years under the GDS (Generally Depreciation System). The recovery period will be 10 years under ADS. Grain bins, cotton ginning assets, fences and land improvements don't qualify.
Copyright 2008 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 11/03/08