News

 Dear Client:

On October 3, President Bush signed into law the Emergency Economic Stabilization Act of 2008. The rescue plan is designed to restore liquidity to the financial markets. At the same time, it includes over 100 tax provisions and over $150 billion in separate tax incentives for individuals and businesses.  It contains numerous provisions affecting financial bailout measures, tax extenders, energy incentives, disaster relief and more.  This letter will highlight some of the provisions affecting your tax situation. 

Many of the tax incentives in the Act are commonly known as extenders.  Some of these temporary tax cuts have been extended so many times that individuals and businesses mistakenly believe they are permanent when, in reality, they are still temporary. The temporary nature of these incentives makes tax planning challenging because you may be able to take a credit or deduction in one year but not in a future year. Fortunately, the extenders under the new law have been passed soon enough to enable use of year-end tax planning strategies that can maximize 2008 tax savings retroactively to the start of 2008, as well as 2009 tax breaks from the beginning of the new year.

Individual Tax Incentives

Increased 2008 AMT Exemption Amounts. The rescue package has some good news for individuals who are liable for alternative minimum tax (AMT). The AMT was created nearly 40 years ago as an alternative tax to the regular income tax to ensure that very wealthy individuals pay their fair share of taxes. However, the AMT was not indexed for inflation and it is ensnaring middle-income taxpayers. To prevent this, Congress created an AMT “patch.” The 2008 patch is similar to past patches but with some important differences.

The 2008 patch raises the AMT exemption amounts to $69,950 for married couples filing jointly and surviving spouses, $46,200 for single taxpayers and heads of household and $34,975 for married couples filing separately. The rescue package also allows taxpayers to take nonrefundable personal credits to reduce their AMT liability. Additionally, and this is a new feature to the patch, the rescue plan abates AMT liability stemming from the exercise of incentive stock options along with interest and penalties on the unpaid amounts. The rescue package also allows individuals, including those who paid their ISO AMT liabilities, to accelerate the refund of the minimum tax credit that has not been used.

Extended Exclusion for Homeowners. When a lender forecloses on property, sells the home for less than the borrower’s outstanding mortgage and forgives all or part of the excess mortgage debt, the Tax Code treats the cancelled debt as taxable income to the homeowner. The Mortgage Forgiveness Debt Relief Act, enacted in late 2007, excludes from federal tax discharges involving up to $2 million of indebtedness ($1 million for a married taxpayer filing a separate return) secured by a principal residence and incurred in the acquisition, construction or substantial improvement of the residence. The new law extends this treatment from the end of 2009 through 2012.

Additional Standard Deduction for Real Property Taxes for Non-itemizers. The rescue package also extends the additional standard deduction for real property taxes. Individuals who do not itemize their deductions may take this deduction in 2008 and 2009. This deduction is not an above the line deduction that lowers your adjusted gross income. It is an addition to the standard deduction, and can reduce your taxable income by as much as $500 ($1,000 for those filing joint returns).

Child Tax Credit. The rescue package also enhances the child tax credit. Before the new law, the child tax credit was refundable to the extent of 15 percent of the taxpayer’s earned income in excess of approximately $12,050. Under the new law, the floor falls to $8,500. This treatment will result in an increase in the amount of the refundable credit for more taxpayers.

Tax Free Distributions from IRAs for Charitable Donations. In 2008 and 2009, an individual age 70 1/2 or older can distribute up to $100,000 of his or her IRA balance to charitable organizations, including churches, without recognizing income and without taking a charitable deduction. This special tax break had expired at the end of 2007.

Energy. Rising fuel costs are pinching many people’s wallets. If you install qualifying energy conservation property, such as exterior windows and doors, in your home you may be eligible to a tax break. The new law extends a number of energy conservation tax incentives and creates a new tax credit for individuals who purchase a plug-in electrical vehicle.

State and Local Taxes. The rescue package gives individuals who itemize their deductions the option of deducting state and local income taxes or deducting state and local general sales taxes. This election was available in past years but expired at the end of 2007. The new law makes it retroactive to January 1, 2008, and extends it for 2009.

Education.  The new law extends through December 31, 2009, the above-the-line deduction for higher education expenses.  The maximum deduction varies from $2,000 to $4,000 depending upon the taxpayer’s income.

Teachers Classroom Expense Deduction. The Tax Code also gives teachers and other education workers a special deduction. Teachers may deduct up to $250 of qualified classroom expenses above-the-line. This special treatment expired at the end of 2007. The rescue package makes it retroactive to January 1, 2008, and extends it through 2009.

    Business Tax Incentives

Research Tax Credit. The rescue package extends the research tax credit to amounts paid or incurred in 2008 and 2009. It also increases the alternative simplified research credit to 14 percent starting next year, a tremendous incentive now for smaller firms to finally use the research credit to grow their businesses.

Leasehold Improvements. Many businesses remodel or otherwise make improvements to their facilities on a regular schedule. Under the new law, qualifying restaurant improvements and leasehold improvements will be eligible for 15-year cost recovery rather than a 39-year period for two more years, through December 31, 2009. Similarly, Congress authorized a 15-year recovery period for depreciation of certain improvements to retail space. This treatment is extended through December 31, 2009. It applies to owner-occupied businesses and restaurants, as well as leased establishments.

Energy Conservation. The new law extends a host of energy tax incentives, some targeted to consumers (including businesses) and others to producers and manufacturers. Many of the extensions go beyond the one or two year periods that Congress authorized for non-energy extenders. Most notable are the extension of the special deduction for energy efficient commercial buildings, through December 31, 2013; and the substantial, long-term tax breaks given to businesses that develop or use solar energy. For businesses in urban areas, a $20/month transportation fringe benefit may be set up for employees who bicycle to work.

Charitable Contributions. The Tax Code gives businesses enhanced deductions for contributions of food to charitable organizations, as well as contributions of books and computer equipment to qualifying schools. The new law extends these tax breaks through December 31, 2009.

S corporation shareholders are also eligible for special tax treatment when making charitable contributions of qualifying property. The new law extends, through December 31, 2009, the special rule allowing S corporation shareholders to take into account their pro-rata share of charitable deductions even if such deductions would exceed such shareholder’s adjusted basis in his or her S corporation.

New Markets Tax Credit. The new law extends the New Markets Tax Credit through December 31, 2009. The New Markets Tax Credit is one of the few incentives in the Tax Code to encourage taxpayers to invest in or make loans to small businesses in economically distressed areas.

Disaster Relief Tax Incentives

    The new law provides temporary, but significant, tax relief to victims of the recent severe storms, tornadoes, and flooding that hit the Midwest and, to a somewhat lesser extent, victims of Hurricane Ike and Gustav in Louisiana and Texas. Additionally, Congress authorized national relief for locations declared disaster areas by the president in tax years beginning after December 31, 2007.

Disaster Relief Provided for Hurricane Gustav Victims in Louisiana. The IRS has extended return filing and payment deadlines for victims of Hurricane Gustav in the Louisiana parishes of Acadia, Allen, Ascension, Assumption, Avoyelles, Beauregard, Calcasieu, Catahoula, Cameron, East Baton Rouge, East Feliciana, Evangeline, Franklin, Grant, Iberia, Iberville, Jefferson, Jefferson Davis, Lafayette, Lafourche, LaSalle, Livingston, Orleans, Plaquemines, Pointe Coupee, Rapides, Sabine, St. Bernard, St. Charles, St. James, St. John the Baptist, St. Helena, St. Landry, St. Martin, St. Mary, St. Tammany, Tangipahoa, Terrebonne, Vermilion, Vernon, Washington, West Baton Rouge and West Feliciana. Taxpayers residing or having businesses in these presidentially declared disaster areas have until January 5, 2009, to file returns, pay taxes and perform other time-sensitive acts otherwise due between September 1, 2008 and January 5, 2009. The extended deadline applies to most tax returns, including individual and corporate income tax returns, but does not apply to information returns in the Forms W-2, 1098 and 1099 series, or to Forms 1042-S or 8027.

The IRS will also waive penalties for the failure to deposit employment and excise taxes due on or after September 1, 2008, and on or before September 16, 2008, as long as the deposits are made by September 16, 2008. Taxpayers whose books, records or tax professionals’ offices are in the covered disaster area are also entitled to relief. 

Disaster Relief Provided for Hurricane Ike Victims in Louisiana.  The IRS has extended return filing and payment deadlines for victims of Hurricane Ike in the Louisiana parishes of Acadia, Beauregard, Calcasieu, Cameron, Iberia, Jefferson, Jefferson Davis, Lafourche, Plaquemines, Sabine, St. Mary, Terrebonne, Vermilion and Vernon. Taxpayers residing or having businesses in these presidentially declared disaster areas have until January 5, 2009, to file returns, pay taxes and perform other time-sensitive acts otherwise due on or after September 11, 2008, and before January 5, 2009. The extension includes individual estimated tax returns and corporate tax returns that were due on September 15 and extended individual returns due on October 15. The postponement of time to file and pay does not apply, however to information returns in the Form W-2, 1098, 1099 series or to Forms 1042-S or 8027.

The IRS will waive the failure to deposit penalties for employment and excise deposits due on or after September 11, 2008, and before September 26, 2008, as long as the deposits are made on or before September 26, 2008. This includes failure to deposit penalties on employment and excise deposits that were waived under previous relief granted due to Hurricane Gustav. Taxpayers whose books, records or tax professionals’ offices are in the covered disaster area are also entitled to relief.

Casualty Losses. Casualty losses attributable to a federally declared disaster occurring after December 31, 2007, and before January 1, 2010, are deductible without regard to whether the losses exceed 10 percent of a taxpayer’s adjusted gross income. For tax years beginning after December 31, 2008, and before January 1, 2010, a deduction for any casualty or theft loss is limited to the amount of the loss that exceeds $500. Additionally, for tax years beginning after December 31, 2007, the standard deduction is increased by the amount of any disaster loss amount.

Net Operating Losses. Present law currently allows net operating losses (NOLs) to be carried back two years.   A special five-year carry back period for NOLs has been created for qualified disaster losses. 

Expensing of Qualified Disaster Costs.  Taxpayers may elect to deduct their qualified disaster expenses when they are paid or incurred, rather than charging them to a capital account. The election is available for amounts paid or incurred after December 31, 2007, in connection with a disaster declared after that date.

Bonus Depreciation for Qualified Disaster Assistance Property.   An additional 50-percent 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.  This 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 property must qualify as “qualified disaster assistance property”. 

Qualified Disaster Assistance Property must meet all of the following tests:

1.      Must have a MACRS recovery period of 20 years or less, computer software, water utility property, or qualified leasehold improvement property, or nonresidential real property or residential rental property. 

2.      Substantially all of the use of the property must be in a disaster area with respect to a federally declared disaster area occurring before 01/01/2010 and in the active conduct of a trade or business in that disaster area.

3.      The property must rehabilitate property damaged, or replace property destroyed or condemned, as a result of the disaster. 

4.      The original use of the property must commence with the taxpayer on or after the applicable disaster date.

5.      The property must be acquired by purchase on or after the applicable disaster date, but only if no written binding contract for the acquisition was in effect before that date.

6.      The property must be placed in service on or before the date that is the last day of the third calendar year following the applicable disaster date, or the fourth calendar year in the case of nonresidential real property and residential rental property. 

The following businesses will not benefit: private and commercial golf courses, country clubs, massage parlors, hot tub or suntan facilities, liquor stores and most gambling concerns. Gambling concerns is defined as any property used directly in connection with gambling, animal racing (or the on-site viewing of such racing) and the buildings or portions of buildings dedicated to these activities.  For example, the hotel and restaurant portions of gambling businesses may qualify, but the actual gambling areas will not qualify.

Increased Expensing for Qualified Disaster Assistance Property.  The maximum Code Sec. 179 expense allowance and the investment limitation amount are both increased for qualified section 179 disaster assistance property. The Code Sec. 179 expense deduction ($250,000 for 2008) is increased by the lesser of $100,000 or the cost of qualified section 179 disaster assistance property placed in service during the tax year

The amount of the investment limitation ($800,000 for 2008) is increased by the lesser of $600,000 or the cost of qualified section 179 disaster assistance property placed in service during the tax year.

 These increases mean that for qualified Section 179 disaster assistance property placed in service during 2008, the maximum allowable Code Sec. 179 expense deduction is $350,000, and the investment limitation is $1,400,000.

Modification of the Work Opportunity Tax Credit for Hurricane Katrina Employees

The work opportunity tax credit (WOTC) covered eligible “Hurricane Katrina employees” that were hired from August 25, 2005 through August 27, 2007.  Under the new law, the eligible hiring period for employers to claim the WOTC for hiring eligible “Hurricane Katrina employees” has been extended an additional two years or until August 25, 2009.  The extension applies to individuals hired after August 27, 2007.

The Emergency Economic Stabilization Act of 2008 is one of the largest tax laws in recent years. You may be able to take advantage of one or more the tax incentives. There is still time in 2008 to utilize these incentives in your strategic tax planning. Planning to take maximum advantage of these incentives in 2009 also should start now. Please call or email our office so we can discuss these opportunities in more detail.

    Sincerely yours,

    HANNIS T. BOURGEOIS, LLP