LOISELLE, GOODWIN & HINDS
CERTIFIED PUBLIC ACCOUNTANTS

Be sure to visit our Archive of Prior News Items.

Note:  Any tax advice contained on this website is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

Economic Stabilization Act of 2008

• Changes affecting individuals
• Changes affecting businesses

How Individuals Are Affected

AMT relief: In general terms, to find out if you owe alternative minimum tax (AMT), you start with regular taxable income, modify it with various adjustments and preferences (such as addbacks for property and income tax deductions and dependency exemptions), and then subtract an exemption amount (which phases out at higher levels of income). The result is multiplied by an AMT tax rate of 26% or 28% to arrive at the tentative minimum tax. You pay the AMT only if the tentative minimum tax exceeds your regular tax bill. Although it was originally enacted to make sure that wealthy individuals did not escape paying taxes, the AMT has wound up ensnaring many middle-income taxpayers. One reason is that many of the tax figures (such as the tax brackets, standard deductions, and personal exemptions) used to arrive at your regular tax bill are adjusted for inflation, but the tax figures used to arrive at the AMT are not.

For 2008 only, the new law provides some relief. It increases the maximum AMT exemption amount over its 2007 level by $3,700 for married taxpayers filing joint returns, and by $1,850 for unmarried individuals and married persons filing separately. However, after 2008 the maximum AMT exemption amount will drop precipitously to where it was in the year 2000 unless Congress provides yet another fix.

Another provision in the new law provides AMT relief for those individuals claiming certain “nonrefundable” personal tax credits (such as the credit for dependent care and the Scholarship and Lifetime Learning credits). For 2008, these credits may offset an individual's regular tax and AMT. After 2008, unless Congress acts, these credits will be allowed only to the extent that an individual has regular income tax liability in excess of the tentative minimum tax.

The new law also liberalized the AMT refundable credit amount that was first enacted in 2006 to help taxpayers who were stung by the AMT as a result of exercising incentive stock options (ISOs). The changes are highly technical but their essence is that for tax years beginning after 2007: (1) eligible individuals may claim this credit more rapidly (i.e., over fewer years) than would have been the case without the change; and (2) the AMT refundable credit amount no longer phases out at higher levels of adjusted gross income (AGI). In addition, the new law wipes out any tax underpayments (plus interest & penalties) outstanding on Oct. 3, 2008, that are attributable to pre-2008 phantom ISO income under the AMT rules.

Retroactively resuscitated and extended tax breaks: All of the following tax breaks had expired at the end of last year. The new law retroactively resuscitates them so that they apply for 2008, and also extends them for one year so that they will apply for 2009 as well:

• The option to claim an itemized deduction for state and local general sales taxes instead of the itemized deduction for state and local income taxes.

• The above-the-line deduction for qualified tuition and related expenses for higher education paid during the tax year.

• The up-to-$250 eligible educator's above-the-line deduction for books, supplies, computer equipment, etc., used by him or her in the classroom.

• The up-to-$100,000 annual exclusion from gross income for taxpayers age 70 1/2 or older who make direct transfers of otherwise taxable individual retirement account (IRA) distributions to qualified charitable organizations.

The new law also extends for one year the nonitemizers' additional standard deduction for State and local property taxes paid. The deduction can't exceed the lesser of state and local property taxes actually paid or $500 ($1,000 for joint return filers). This deduction was supposed to have been available only for 2008, but the new law makes it available for 2009 as well.

Deductions for energy saving home improvements extended and expanded: Two tax credits are available for taxpayers who make energy saving improvements to residences. They've both been extended by the new law and expanded as well:

1. A generous tax credit is available to individuals who add solar energy equipment or fuel-cell equipment (new technology that converts fuel into electricity using electromechanical methods, and meets other detailed requirements) to their residences. The new law extends this credit through 2016. It also liberalizes the credit in an important way: For 2008, you can claim a tax credit of 30% of the cost of equipment that uses solar energy to generate electricity (photovoltaic property), up to a $2,000 maximum tax credit. After 2008, there's no dollar limitation on the credit. For example, suppose you spend $8,000 buying and installing solar heating panels on your residence. If you make the improvement this year, you may claim a maximum credit of $2,000, but if you make the improvement next year, you may claim a credit of $2,400 (30% of $8,000). Additionally, starting with 2008, the new law makes the credit available for more-exotic energy generating/retaining equipment: wind turbines; and geothermal heat pumps. 
   
   

2. For equipment installed before 2008, you could claim a credit for the cost of buying an assortment of energy saving improvements and installing them in your main home. The credit depends on the type of improvement (e.g., 10% of the cost of energy efficient building envelope components, such as insulation and windows, and an up to $150 credit for a natural gas, propane, or oil furnace or hot water boiler) and there's an overall $500 lifetime dollar limit for all improvements.

The new law does not extend this credit for qualifying equipment bought and installed in 2008, but it does make it available once again for qualifying equipment bought and installed in 2009. Also, for 2009, the new law makes the credit available for certain types of energy efficient biomass fuel stoves and certain types of energy saving asphalt roofs.

New tax relief for victims of Presidentially declared disasters: Individuals may deduct personal casualty losses (e.g., unreimbursed damage to a car due to a storm) or personal theft losses only if they exceed a $100 limit per casualty or theft and only to the extent these losses in the aggregate exceed 10% of adjusted gross income (AGI). If the disaster occurs in a Presidentially declared disaster area, an individual may elect to take into account the casualty loss in the year immediately preceding the year in which the disaster occurs. Before 2008, only itemizers could deduct casualty losses.

The new law waives the 10%-of-AGI limit for victims of disasters declared to be federal disasters in 2008 and 2009, plus, for these years, permits nonitemizers to claim a deduction for federal disaster losses. However, for 2009 only, the new law boosts the $100 per casualty limit to $500 (which will have the effect of reducing deductions).

The new law also gives a number of extra tax breaks to victims of the storms and hurricanes that pummeled ten Midwest states during 2008.

More detailed reporting of securities transactions – after 2010: Stock brokers must file an information return (Form 1099-B) for securities transactions they handle. Currently, brokers report the name and address of the customer, when the sale took place, what was sold, and the gross proceeds of the sale. Starting with stocks (as well as bonds and several other financial instruments) bought after 2010 (a later date applies to some specialized securities), brokers will have to report the customer's adjusted basis (essentially cost for tax purposes) and whether a gain or loss on the transaction was short- or long-term. This new information reporting requirement is designed to boost IRS's compliance efforts (e.g., help assure taxpayers properly report their gains and losses).

Please keep in mind that this only describes the highlights of how the new law affects individuals. If you would like more details, please contact us at your convenience.

How Businesses Are Affected

As you may be aware, on October 3, 2008, the President signed into law the Emergency Economic Stabilization Act of 2008 (P.L. 110-343). Although virtually all of the press coverage of this law has concentrated on its hotly debated $700 billion financial industry bailout plan, the legislation also contains scores of mostly beneficial tax changes for business.

Most of the new law's tax changes for business fall into one of these categories: tax changes that apply to a wide range of businesses; special tax breaks for disaster areas; and tax changes for specialized industries (there are numerous tax breaks relating to alternative energy production, but they are highly specialized and so not covered in this letter).

Tax breaks that apply to a wide range of businesses. The major news for business is that the research tax credit has been extended through 2009. The new law also makes a number of important changes in the way the research credit is calculated, effective for tax years beginning after 2008.

Other, widely applicable tax breaks for business include the following:

• The FUTA (Federal Unemployment Tax Act) tax rate had been scheduled to drop to 6% after 2008, but under the new law it will remain at 6.2% through 2009 and will drop to 6% for 2010 and later.
• For property placed in service after Aug. 31, 2008, the new law permits 50% first year bonus depreciation for qualified reuse and recycling property. In general, this is machinery and equipment (not including buildings or real estate), along with associated property, including software necessary to operate the equipment, which is used exclusively to collect, distribute, or recycle qualified reuse and recyclable materials. This break is not limited to businesses in the recycling industry.
• A two year extension through 2009 of enhanced charitable contribution deduction rules for gifts of certain types of food inventory, and corporate gifts of book inventory or computer equipment to schools.
• A two year extension through 2009 for the tax break that allows expensing of qualified environmental remediation expenses, namely cleanup of hazardous substances (including petroleum products) at qualified contaminated sites.
• The deduction for energy efficient commercial building property has been extended so that it applies through 2013.
• For purchases after 2008 and before 2015, taxpayers will be able to claim a tax credit for electric drive motor vehicles.
• After 2008, companies will be able to give employees who commute by bicycle a $20 per month tax-free reimbursement for reasonable bicycle related expenses.

Tax breaks for businesses in disaster areas. The new law creates a new set of tax relief provisions for businesses hit by events such as storms, hurricanes, and floods anywhere in the U.S. that are declared to be federal disasters after 2007 and before 2010. These are of great importance to businesses because many federal disasters have already been declared in numerous states in 2008 and many others are likely to occur before the tax breaks sunset.

Here's a summary of the new relief provisions:

• Qualified disaster expenses, such as cleanup (removal of debris, demolition of structures) and repairs, may be expensed.

• A 5-year net operating loss (NOL) carryback applies instead of the usual 2-year carryback.

• The maximum amount of machinery and equipment that may be expensed under Section 179 is increased by up to $100,000 for qualifying assets, and the investment-based phaseout of the expensing deduction is increased by $600,000.

• A 50% first-year bonus depreciation allowance applies to most types of machinery and equipment bought to rehabilitate or replace damaged property. A number of conditions must be met, and certain types of property are excluded.

The new law also includes a number of specialized provisions for victims of a Midwest disaster area (counties in ten Midwest states declared to be a major disaster after May 19, 2008, and before August 1, 2008).

Tax breaks for specialized industries. Tax breaks in the new law mainly benefiting specific industries include the following:  

• Financial institutions—may treat post-2007 losses on Fannie Mae and Freddie Mac preferred stock as ordinary losses instead of capital losses; for tax years ending after Oct. 2, 2008, the $1 million deduction cap on compensation paid to certain top officers is reduced to $500,000 if the company participates in the federal government's “troubled assets relief program” (TARP); and the “golden parachute” deduction restrictions apply to severance payments to certain top executives of companies participating in TARP. Finally, for securities acquired after 2010 (later dates apply to some specialized securities), brokers will have to report the customer's adjusted basis in the security sold, and whether any gain or loss is short- or long-term. 
  
  

• Farming—there's a 5-year quick depreciation writeoff for most farm machinery and equipment placed in service after 2008 and before 2010. 
  
  

• Real estate, retailers, and restaurants—the 15-year depreciation writeoff for qualifying leasehold improvements and qualifying restaurant property has been extended through 2009. What's more, for property placed in service after 2008 and before 2010, (a) buildings as well as building improvements may qualify for the quick writeoff for restaurant property; and (b) the 15-year depreciation writeoff also applies to qualifying retail improvement property. 
  
  

• Construction companies—the $2,000 tax credit for building energy efficient homes ($1 million for manufactured homes) has been extended to apply to homes acquired through 2009. Note that construction companies also may benefit indirectly from the extended and enhanced tax breaks for real estate, restaurants, and retailers. 
  
  

• Film and TV—the option to expense up to $15 million of qualifying film and TV productions ($20 million if produced in certain low-income areas) is extended so that it applies for productions beginning before 2010; also, the qualified domestic production activities deduction has been liberalized in several ways for this industry, effective for tax years beginning after 2007. 
  
  

• Motorsports racing—the short 7-year writeoff for land improvements and support facilities at motorsports entertainment complexes has been extended to apply for property placed in service before 2010. 
  
  

• Oil and gas—there are three significant changes: (1) the otherwise available domestic production activities deduction for companies that have oil-related income will be reduced after 2009 (a complex reduction formula will apply); (2) the rule providing that percentage depletion from marginal oil and gas wells isn't limited to 100% of income from these properties is extended though 2009; and (3) the rules relating to foreign tax credits for the oil and gas industry have been revised for tax years beginning after 2008. 
  
  

• Mining—the tax credit for mine rescue training and the election to expense 50% of the cost of certain mine safety equipment both have been extended so that they apply through 2009.  
  

Please keep this only describes the highlights of how the new law affects businesses. If you would like more details, please contact us at your convenience.

(11/06/2008) 

Be sure to visit our Archive of Prior News Items.

Send mail to with questions or comments about this web site.
Last modified: November 25, 2008