Corporate Taxation Individual Taxation News

Dear Client:

To help jumpstart the economy, Congress recently passed the Economic Stimulus Act of 2008.  It is designed to inject $152 billion into the U.S. economy.  More than 100 million Americans will receive rebate checks this year, along with child payments for qualifying children.  Businesses can take advantage of two tax breaks: enhanced Code Sec. 179 expensing and bonus depreciation.

Rebates.  The rebates are technically a refundable credit against tax.  If you filed a 2007 income tax return, the IRS figures the rebate for you and will send it by mail or direct deposit without your having to take any further action.  If you did not file a 2007 return but still qualify for a rebate because of your earned income level, combat pay, or receipt of Social Security benefits, the IRS has promised to announced how you will get on the rebate list.

Most single individuals (including heads of households and marrieds filing separately) with adjusted gross income (AGI) of less than $75,000 and who pay federal income tax will receive a $600 rebate.  Most married couples filing jointly with adjusted gross income of less than $150,000 and who pay federal income tax will receive $1,200.  However, the rebates start to phase-out when a single person’s income is greater than $75,000 ($150,000 for married couples filing jointly).  The $600 credit for individuals therefore phases out completely at $87,000 AGI and the $1,200 credit for married couples filing jointly phases out completely at $174,000 AGI.  Lower income individuals and people living on Social Security or VA benefits will receive minimum rebates of $300.

Filers on extension.  Because the rebates are based on your 2007 return, is you file your return after April 15, 2008, your rebate will be delayed.  For example, individuals on extension this year who do not file their 2007 return until the extended October 15, 2008 deadline will not receive their checks until year-end.  No checks will be sent after December 31, 2008.  After 2008, those who missed out on the rebate or received only a partial rebate get a second chance at qualifying with 2008 data when they file their 2008 return in 2009.

Although the determination of the rebate is based on the 2007 tax year, it technically remains a credit against 2008 tax, payable in the form of an advance payment.  Consequently, a taxpayer filing a 2007 return in 2008 cannot claim the rebate as an offset to his or her 2007 tax liability reported on that return in lieu of waiting to receive a check.  Neither can the taxpayer choose instead to count the rebate as part of an estimated tax installment for either 2007 or 2008.

Distribution.  The Treasury Department and the IRS will issue the rebate checks.  The rebates come at a very busy time for the IRS, which is processing tens of millions of 2007 returns and issuing tens of millions of refund checks.  Although the Treasury Department and the IRS have not released any specifics, they will likely start to issue the rebate checks in May.  The government is also likely to utilize direct deposit as much as possible rather than issuing paper checks.

Child payments.  Besides the rebates, taxpayers with children may be eligible for $300 payments per child.  For purposes of the new law, the child tax credit definition of qualifying child applies. The child credit is allowed with respect to each qualifying child of a taxpayer.  A qualifying child must not have attained the age of 17 as of the close of the calendar year in which the taxpayer’s tax year begins.  The qualifying child must be the taxpayer’s qualifying child for the purposes of the dependency exemption.  Finally, the child must be a son, daughter, stepson, stepdaughter, or descendent of such child, or a brother, sister, stepbrother, stepsister or a descendant of such relative.

Just like the rebates, the child payments phase out for higher income taxpayers.  However, there is no cap on the number of child payments that qualifying taxpayers may receive.

Business incentives.  The new law nearly doubles the amount of deductible Code Sec. 179 expensing for 2008 and also provides for bonus depreciation.

Small business expensing.  Before the new law, a business could expense up to $128,000 of the cost of qualifying property in 2008.  Is the cost of qualified property placed in service during the year is more than $510,000, the ceiling for that business is reduced by the amount over the applicable limit.  Under the new law, a business can expense up to $250,000 of the cost of the qualifying property, and the old $510,000 ceiling jumps to $800,000.

The new law makes no changes to the general rules for the types of property that are eligible for expensing.  Generally, the property must be tangible personal property, which is actively used in the taxpayer’s business and for which a depreciation deduction would be allowed.  The property must be used more than 50 percent for business and must be newly purchased property.

Bonus deprecation.  The other incentive is bonus deprecation.  The new law provides qualifying taxpayers 50 percent first-year bonus depreciation of the adjusted basis of qualifying property.

To be eligible to claim bonus depreciation, property must be 1) eligible for the modified accelerated cost recovery system (MACRS) with a depreciation period of 20 years or less; 2) water utility property; 3) computer software (off-the-shelf); or 4) qualified leasehold property.  The property generally must be purchased and placed in service during 2008.  Original use of the property must begin with the taxpayer and must occur after December 31, 2007 and before January 1, 2009.

Congress also increased the Code Sec. 280F limitations on “luxury” auto depreciation to accommodate a modified version of the 50%-bonus depreciation available to other “MACRS” property.  Ordinarily, the first-year limit on depreciation for passenger automobiles cannot exceed $3,060.  The new law raises the cap by $8,000 if bonus depreciation is claimed for a qualifying vehicle.  Thus, for passenger autos, the cap on 50 percent bonus depreciation is set at $11,060; for trucks and vans, $11,260.

As always, if you have any questions about the new law, don’t hesitate to contact us.  We are ready to help you maximize your tax savings.

Sincerely yours,

Hannis T. Bourgeois, LLP