Planning During Changing Times

In an attempt to stimulate the economy, Congress has passed several significant tax acts in 2008. Two of the acts were targeted toward special groups, while the other two were for the general taxpaying public.

The Food, Conservation, and Energy Act of 2008 carries a host of specialized tax breaks for the farming industry, while the the Hero’s Act of 2008 targets relief for members of the military and their families. The Economic Stimulus Act of 2008 offers a range of tax breaks for individuals and businesses — the act allows individuals a tax rebate of various amounts based on their filing status and number of dependents claimed on their 2007 tax return that was filed with the Internal Revenue Service. Businesses are given significant tax breaks from an increase in the Section 179 depreciation limits and additional depreciation available on assets placed in service for tax years beginning in 2008.

Lastly, Congress passed and the president signed the Emergency Economic Stabilization Act of 2008 into law on October 3, 2008. While this act was primarily signed into law to solve the credit crunch in the financial markets, there are some major tax provisions included in the act.

What follows is a look at some of the highlights of these acts.

First, the Economic Stimulus Act increase in the Section 179 expense for 2008 only. Under the Small Business and Work Opportunity Tax Act of 2007 (SBWOTA), the maximum Sec. 179 expense on qualifying tangible property and off-the-shelf computer software for 2008 was $128,000, and the total qualifying asset phase-out threshold was $510,000. The deduction has also been limited to the amount of taxable income from the taxpayer’s active trades or business. However, the Economic Stimulus Act increases the Sec. 179 expense amount to $250,000 and the phase-out threshold to $800,000 for tax years beginning in 2008. With the increased phase-out threshold, it is unlikely that a small business would eclipse the $800,000 phase-out level and therefore be able to deduct the full cost of assets placed in service in 2008 up to $250,000. In 2009, the limits will revert back to the SBWOTA limits adjusted for inflation.

The Economic Stimulus Act also amends the Code to allow taxpayers to take ‘bonus depreciation’ in 2008. The rules are similar to the bonus depreciation allowed in 2003 through 2005. For assets placed in service after Dec. 31, 2007 and before Jan. 1, 2009, taxpayers are allowed to take an additional 50% first-year depreciation deduction on qualified property. Qualified property includes most tangible personal property, ‘qualified leasehold improvement property,’ and most computer software. The bonus depreciation deduction is available only on new assets placed in service and not used assets. The adjusted basis of the property is reduced by the bonus depreciation before computing the amount otherwise allowable as a depreciation deduction for the tax year. The deduction applies to the regular tax and the alternative minimum tax.

Under the luxury-auto dollar caps, the allowable depreciation for the first year on passenger automobiles is usually limited under the code to $2,960 for autos placed in service in 2008. To allow taxpayers to take advantage of the bonus depreciation provisions, the Economic Stimulus Act allows for the increase of the deprecation limit by $8,000 to $10,960 in 2008 for qualified vehicles.

Heavy sport-utility vehicles (SUVs) are marketed and sold as trucks. SUVs that have a gross vehicle weight (GVW) rating in excess of 6,000 pounds are exempt from the luxury-auto dollar caps because they are not within the code’s definition of a passenger automobile. The American Jobs Creation Act of 2004 imposed a limit on the Sec. 179 deduction of SUVs to $25,000. With the Economic Stimulus Act, the owner of an SUV placed in service in 2008 could be entitled to write off most of the cost of the vehicle. For example, if a taxpayer purchased a $50,000 SUV in 2008 and used it 100% for business, he or she may write off $40,000 of the cost of the vehicle in 2008. The SUV would be eligible for a $25,000 Sec. 179 deduction, $12,500 of bonus first-year deprecation ($50,000 – 25,000 Sec. 179 x 50% = 12,500) plus $2,500 of regular first-year depreciation.

Not all vehicles with a GVW greater than 6,000 pounds are considered SUVs. Vehicles with a GVW greater than 6,000 pounds, built on a truck chassis, with an open cargo area or converted box, not readily accessible from the passenger compartment, of at least six feet in length are not subject to the $25,000 Sec. 179 limitation. These vehicles may be depreciated under the regular rules that apply to five-year property, including the first-year bonus depreciation and increased Sec. 179 deduction explained above. This exception can apply to many pickup trucks, but be careful, since some ‘quad’ cabs do not have six-foot beds and therefore fall under the SUV rules.

The standard mileage allowance for owned or leased autos has been increased 8 cents from 50.5 cents to 58.5 cents per business mile for travel from July 1, 2008 to Dec. 31, 2008 to better reflect the real cost of operating an auto in this period of rising gas prices.

The Emergency Economic Stabilization Act tax incentives impact both individuals and businesses. The item that will possibly have the greatest effect on individual taxpayers is the alternative minimum tax (AMT) patch. Under the Act, the AMT exemption amounts increased to $69,950 for married couples filing jointly and surviving spouses, $46,200 for single taxpayers and head of households, and $34,975 for married couples filing separately for 2008. The patch is designed to help middle-income taxpayers avoid the reach of AMT. It is estimated that the patch will save middle-income taxpayers approximately $61.8 billion in 2008. The patch is only for 2008. The patch also allows taxpayers to use nonrefundable personal credits to reduce their AMT liability.

Tax relief for individuals has also come in the form of the extension of many popular tax breaks that have become somewhat permanent since they are extended every year or two. The items that have been extended are: state and local sales tax deduction as an itemized deduction, the teachers’ classroom expense deduction as an above-the-line deduction, tax-free distributions from IRAs for charitable purposes, higher-education tuition deduction as an above-the-line deduction, and the additional standard deduction of real property taxes for non-itemizers, which is new for 2008 and has been extended through 2009.

The new act also includes many incentives targeted to businesses, several of which revise and extend tax benefits. The most significant are revised research tax credit and the enhanced depreciation for leasehold and restaurant improvements. The new act extends the research tax credit to amounts paid or incurred in 2008 and 2009.

It also modifies the credit, increasing the alternative simplified credit while repealing the alternative incremental research credit. Qualifying restaurant improvements and leasehold improvements will be eligible for 15-year cost recovery rather than a 39-year period for two more years or through Dec. 31, 2009. Congress also authorized a 15-year recovery period for depreciation of certain improvements to retail space through Dec. 31, 2009. There are several other provisions that do not have a wide-ranging effect on businesses.

There is still time to take advantage of these tax-saving items offered in the various acts of 2008. Please consult your tax advisor with any specific tax questions or scenarios that you may have or to understand how these provisions may benefit you.v

Sean Wandrei, CPA is a tax manager at Meyers Brothers Kalicka, P.C. He also serves as treasurer of the Young Professionals Society of Greater Springfield; (413) 536-8510.