Dear Client,
The Emergency Economic Stabilization, Energy Improvement and Extension, and Tax Extenders and AMT Relief Acts of 2008, all enacted on Oct. 3, 2008, provide extensions for several popular tax breaks and the addition of several new relief provisions, including disaster area tax relief. Here's an overview of the key provisions in the new legislation that are most likely to affect our clients:
- Deduction of state and local general sales taxes. The option to deduct state and local general sales taxes is extended through 2009.
- Qualified tuition deduction. The above-the-line tax deduction for qualified higher education expenses is extended through 2009.
- Teacher expense deduction. The provision allowing teachers an above-the-line deduction for up to $250 for educational expenses is extended through 2009.
- IRA rollover provision. The provision allowing qualified taxpayers to make tax-free contributions from their IRA plans to qualified charitable organizations is extended through 2009.
- Additional standard deduction for real property taxes. The standard deduction for real property taxes for non-itemizers is extended through 2009.
- Research and development credit. The research tax credit is extended through 2009. In addition, the alternative simplified credit is increased from 12% to 14% for the 2009 tax year, and the alternative incremental research is repealed for the 2009 tax year.
- 15-year straight-line cost recovery for qualified leasehold, restaurant, and retail improvements. The 15-year writeoff for qualified leasehold, restaurant and retail improvements is extended through 2008.
- Basis adjustment to stock of an S corporation making charitable contributions of property. Favorable Subchapter S basis rules for gifts of appreciated property are extended through 2009.
- Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico. The provision allowing a Section 199 domestic production activities deduction for activities in Puerto Rico is extended through 2009.
- Additional tax relief provisions. In addition to the extensions of tax relief described above, the 2008 Extenders Act also includes liberalizations for the child tax credit, income averaging for Exxon Valdez litigation amounts, a 5-year writeoff for certain farming equipment, and a change in the standards for imposition of the tax return preparer penalty.
- Disaster relief. Included in the new legislation is Midwestern disaster area tax relief, and a new tax relief package for victims of all Federally-declared disasters occurring after Dec. 31, 2007 and before Jan. 1, 2010 (e.g., eased loss deduction rules, a new business writeoff for demolition, cleanup and repair, a 5-year carryback for casualty losses or qualified disaster expenses, bonus 50% first year depreciation for property placed in service through Dec. 31, 2011 (Dec. 31, 2012 for real property), and increased expensing dollar limits).
- Alternative Minimum Tax - New law provides one-year stopgap fix. To prevent the unintended result of having millions of middle-income taxpayers fall prey to the AMT, Congress has once again relied on a temporary 'patch' to the problem, this time a one- year extension of the 2007 exemption amounts, increased slightly. Under the new law, for tax years beginning in 2008, the AMT exemption amounts are increased to: (1) $69,950 in the case of married individuals filing a joint return and surviving spouses; (2) $46,200 in the case of unmarried individuals other than surviving spouses; and (3) $34,975 in the case of married individuals filing a separate return.
- Personal credits may be used to offset AMT through 2008. Another provision in the new law provides AMT relief for taxpayers claiming personal tax credits. The tax liability limitation rules generally provide that certain nonrefundable personal credits (including the dependent care credit, the elderly and disabled credit, and the Hope Scholarship and Lifetime Learning credits) are allowed only to the extent that a taxpayer has regular income tax liability in excess of the tentative minimum tax, which has the effect of disallowing these credits against AMT. Temporary provisions had been enacted which permitted these credits to offset the entire regular and AMT liability through the end of 2007. The new law extends this temporary provision to tax years beginning in 2008.
- Extension and modification of AMT credit allowance against incentive stock options (ISOs). A further provision in the new law liberalizes the AMT refundable credit that was first enacted in 2006 to help taxpayers who were stung by the AMT as a result of exercising incentive stock options (ISOs). Under the regular tax, ISOs are not taxed upon exercise. Under the AMT, however, a taxpayer generally must pay tax on the stock value minus the price paid when the option is exercised. The economic downturn in 2000 resulted in many individuals having to pay tax on 'phantom income' because the stock prices dropped dramatically after the date of exercise. In 2006, Congress provided relief for these situations by increasing the amount of the minimum tax credit allowed to individuals generally and providing for a partial refund, but this relief did not correct the ISO problem entirely. The new law provides additional relief to affected taxpayers by accelerating the refund attributable to AMT paid on the phantom ISO income (and other AMTI amounts) and by stopping further IRS efforts to collect unpaid amounts. Specifically, the new law allows 50% of long-term unused minimum tax credits to reduce tax over each of two years (instead of 20% over each of five years as was allowed under pre-2008 Extenders Act law), eliminates a rule that limited the relief available to higher-income taxpayers, and abates any underpayment of tax (and applicable interest and penalties) outstanding on Oct. 3, 2008 that is attributable to pre-2008 phantom ISO income.
- Three-year extension of home mortgage debt forgiveness relief. The new law provides assistance to homeowners who have either lost their homes to foreclosure or are trying to save their homes by restructuring their mortgages. Under 2007 tax legislation, taxpayers can generally exclude up to $2 million of mortgage debt forgiveness on their main home. This relief provision had been scheduled to expire at the end of 2009. The new law extends this debt relief provision through the end of 2012.
Several popular charitable incentives expired at the end of 2007 and would not have been available to taxpayers on their 2008 tax returns if Congress had not acted. The new law restores the provisions and extends them for two years (through 2009). The extended provisions include:
- IRA charitable rollover. This provision allows individuals aged 70 1/2 and older to donate up to $100,000 from their individual retirement accounts (IRAs) and Roth IRAs to public charities without having to count the distributions as taxable income. This giving incentive is particularly beneficial to those individuals who do not itemize their tax deductions and would not otherwise receive any tax benefit for their charitable contributions.
- Enhanced charitable deduction for food inventory. This provision allows businesses to claim an enhanced deduction for the contribution of food inventory. The new law also eliminates the percentage limitation for contributions made by certain farmers and ranchers after Dec. 31, 2007, but before Jan. 1, 2009.
- Enhanced charitable deduction for contributions of book inventory to schools. This provision allows C corporations an enhanced charitable deduction for donations of books to schools, public libraries and literacy programs.
- Enhanced charitable deduction for qualified computer contributions. This provision encourages businesses to contribute computer equipment and software to elementary, secondary, and post-secondary schools by allowing an enhanced deduction for such contributions.
- Basis adjustment to stock of S corporations making charitable contributions of property. Under this provision, if an S corporation makes a contribution to a charity the amount of a shareholder's basis reduction in the S corporation stock will be equal to the shareholder's pro rata share of the adjusted basis of the contributed property (rather than the pro rata share of the fair market value of the contribution, as was the case under prior law).
New incentives for charitable giving contained in the new legislation include:
- Temporary suspension of limitations on charitable contributions. The amount allowed as a charitable deduction in any year may not exceed ten percent of the corporation's taxable income or fifty percent of an individual's adjusted gross income. The new law temporarily waives these limits regarding charitable cash contributions dedicated to Midwestern disaster relief efforts. The provision is effective for contributions paid during the period beginning on the earliest applicable disaster date for all States and ending on December 31, 2008.
- Increase in standard mileage rate for charitable use of vehicles. The mileage rate individuals may use to compute a tax deduction for personal vehicle expenses associated with charitable work is statutory and has not been increased since 1997 and is currently at 14 cents per mile. For a taxpayer assisting in relief efforts related to the Midwestern disaster, the new law sets the charitable mileage rate at seventy percent of the current standard business mileage rate, beginning on the applicable disaster date and ending on Dec. 31, 2008.
- Exclusion from income of mileage reimbursements for charitable volunteers. In general, reimbursements received for operating expenses of a personal vehicle used in connection with charitable work in excess of the statutory charitable mileage rate are taxable income to the recipient. However, reimbursements for charitable mileage attributable to the Midwestern disaster up to the amount of the standard business mileage rate will not be considered taxable income through Dec. 31, 2008.
- Long-term extension of energy credit. The 30% investment tax credit for solar energy property and qualified fuel cell property, as well as the 10% investment tax credit for microturbines, are extended through 2016. The cap for qualified fuel cells is increased, and small commercial wind is added as a category of qualified investment. A new 10% investment tax credit is provided for combined heat and power systems and geothermal heat pumps. These credits may be used to offset the alternative minimum tax (AMT).
- Long-term extension and modification of the residential energy-efficient property credit. The credit for residential solar property is extended through 2016, and the credit cap ($2,000 under pre-2008 Energy Act law) for solar electric investments is removed. Residential small wind investment, capped at $4,000, and geothermal heat pumps, capped at $2,000, are added as qualifying property. The credit may be used to offset the AMT.
- Plug-in electric drive vehicle credit. For tax years beginning after 2008, consumers could collect a tax credit of $2,500 to $7,500 for the purchase of a light-duty plug-in electric car or light truck, depending on the capacity of the battery. The credit is available against the AMT.
- Bicycle commuters. Employers are allowed to provide employees who commute to work by bicycle limited fringe benefits to offset the costs of such commuting (e.g., storage).
- Extension and modification of credit for energy-efficiency improvements to existing homes. The tax credit for energy-efficient existing homes is extended for 2009 and is expanded to include energy-efficient biomass fuel stoves as a new class of energy-efficient property eligible for a consumer tax credit of $300.
- Extension of energy-efficient buildings deduction. The law allowing taxpayers to deduct the cost of energy-efficient property installed in commercial buildings is extended through 2013.
- Extension of credit for energy-efficiency improvements to homes. The provision allowing homeowners to receive a credit for installing energy efficient windows and doors will be available again in 2009, but is not available for items place in service during 2008.
- Investments in recycling. Taxpayers can claim accelerated depreciation for purchases of equipment used to collect, distribute or recycle a variety of commodities.
Other Items to Note
Standard Mileage Rates: The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) increased 8¢ from 50.5¢ to 58.5¢ per mile for business travel from July 1, 2008 to Dec. 31, 2008 to better reflect the real cost of operating an auto in this period of rapidly rising gas prices. This rate can also be used by employers to reimburse tax-free under an accountable plan employees who supply their own autos for business use. The rate for using a car to get medical care or in connection with a move that qualifies for the moving expense will also increase 8¢ for the last half of 2008 from 19¢ to 27¢ per mile.
Beginning on January 1, 2009, the standard mileage rates for the use of a car, van, pickup or panel truck will be 55¢ per mile for business miles driven, 24¢ per mile driven for medical or moving purposes, and 14¢ per mile driven in service of charitable organizations.
Social Security wage base rises to $106,800 for 2009: The Social Security Administration has announced that the wage base for computing the Social Security tax (OASDI) in 2009 rises to $106,800 from $102,000 in 2008, an increase of about 4.7%. The $4,800 increase is due to an increase in average total wages.
Nanny tax threshold increases to $1,700 for 2009: On Social Security Online, the Social Security Administration has announced that for 2009, cash remuneration paid by an employer for domestic service in the employer's private home isn't FICA wages if the amount paid during the year is less than $1,700 (increased from $1,600 for 2008).
Beginning with wages paid in 2009, IRS final regulations will require disregarded entities to pay their own employment taxes and file their own tax reports [Reg. § 1.1361-4]. Disregarded entities are subject to employment taxes in 2009 and will need an EIN Reg. § 1.1361-4(a)(7); Reg. § 301.7701-2(c)(2)(iv).
Under the disregarded entity rules, certain single-owner eligible entities and qualified subchapter S subsidiaries (QSubs) are disregarded as entities separate from their owners for tax purposes. As a result, the disregarded entity is ignored, and its property and activities are treated as those of the owner of the entity. In Notice 99-6, 1991-1 CB 321, the IRS said that employment tax obligations for employees of a disregarded entity may be satisfied in one of two ways: (1) payment by the owner under the owner's name and tax ID number (as though the employees of the disregarded entity were employed directly by the owner), or (2) separate calculation and payment by the disregarded entity under its own name and tax ID number. However, final regs issued in 2007 provide that, effective with wages paid in 2009, a disregarded entity is treated as a separate entity for purposes of employment taxes and related reporting requirements. The final regs state that the separate entity should be treated as a corporation for purposes of employment taxes and related reporting requirements [Reg. § 1.1361-4(a)(7); Reg. § 301.7701-2(c)(2)(iv)].
Illustration of new rules. RIA illustration: LLC is an entity owned by individual A and is generally disregarded as an entity separate from its owner for tax purposes. LLC has employees and pays wages. Under the final regs, LLC is treated as an entity separate from its owner for employment tax purposes. Accordingly, LLC is required to perform such acts as are required of an employer under the Code and regs. Thus, for example, LLC is liable for income tax withholding, as well as FICA and FUTA taxes. LLC must file under its own name and tax ID number the applicable forms in the 94X series (e.g., Form 941, Employer's Quarterly Employment Tax Return, and Form 940, Employer's Annual Federal Unemployment Tax Return ), file with the Social Security Administration and furnish to LLC's employees statements on Forms W-2, and make timely employment tax deposits.
Under the final regs, a disregarded entity continues to be disregarded for other federal tax purposes. The final regs also note that an owner of a disregarded entity treated as a sole proprietorship is subject to self-employment taxes. The final regs do not apply to the backup withholding provisions in IRC §3406.
Barto, Hoss & Company
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