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• Tax Highlights

Emergency Economic Stabilization Act of 2008 Offers Many Tax Benefits

On Oct. 3, President Bush signed H.R. 1424, the Emergency Economic Stabilization Act of 2008 (the Act) into law. This 451-page bill establishes a $700 billion Treasury fund to purchase troubled assets from financial institutions.

The Act also includes 41 pages of tax provisions, including $17 billion in energy tax incentives, a one-year provision designed to limit the affect of the alternative minimum tax (AMT), extension of many other expired or expiring tax provisions, and tax relief for victims of recent natural disasters. The energy-related provisions are too numerous to list in this alert. For details, see this government summary.

New law extends key business tax provisions

• R&D credit extended through 2009. The regular R&D credit equals 20% of the amount by which qualified research expenses for a taxable year exceed a taxpayer's base amount for that year (or 13% if you elect to lower the R&D percentage, which does not require you to add-back to taxable income the amount of the credit claimed).
  
  The IRS has been vigorously auditing R&D credits. Under the standard credit, many midsize businesses find it virtually impossible to document R&D expenses dating back to the base period from 1983 to 1988. It is also very difficult to document precisely when R&D expenses were first incurred if the business had no R&D expenditures from 1984 to 1988. This burden of proof has led many midsize companies to use the Alternate Simplified Research Credit, where the look-back period is only three years.
  
  Under the Act, the Alternative Simplified Credit has also been extended through 2009. The credit has been increased from 12% to 14% for tax year 2009.
• Deduction for capital improvements to make a building energy efficient extended through 2013. Taxpayers can deduct the otherwise capitalizable cost of energy-efficient property installed in commercial buildings from their tax returns. Up to $1.80 per square foot of building floor area can be deducted for buildings achieving a 50% energy savings target. Energy savings must be accrued directly from energy and power cost reductions for the building's heating, cooling, ventilation, hot water and interior lighting systems. Many of these cost reductions require strict documentation by the taxpayer. A lesser energy-efficiency savings is needed for lighting improvements. Lighting improvements also do not require as much documentation.
• Accelerated cost recovery. The Act extends special 15-year (versus 39-year) straight-line cost recovery for qualified leasehold and restaurant improvements through 2009. Effective for 2009, the law has been modified to include retail owners and new restaurants under this provision.
• Manufacturers earn tax credit for energy-efficient appliances. The Act increases the standards and amounts of the tax credit for U.S.-made energy-efficient dishwashers, clothes washers and refrigerators. This tax credit is generally extended through 2010, however the credit is extended through 2008 or 2009 for certain appliances.
• Contractors get tax credit for construction of energy-efficient new homes. The Act extends the credit through 2009 for construction of new homes that reduce heating and cooling energy consumption relative to a comparable home. The credit is $1,000 for homes meeting a 30% efficiency standard and $2,000 for those achieving a 50% standard.
• Special relief for victims of Midwest disaster areas. This includes areas of Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin—as well as any federally declared disasters after Dec. 31, 2007 and before Jan. 1, 2010. Benefits include eased loss deduction rules; new business write-offs for demolition, cleanup and repairs; and a five-year carryback for casualty losses or qualified disaster expenses.
• $24.8 billion revenue raiser affects deferred compensation. A new revenue-raising provision is aimed at fund managers and others working for certain targeted entities. The law requires current taxation of deferred compensation accrued by "tax-indifferent parties" related to these entities. Tax indifferent entities are generally foreign corporations not subject to U.S. tax, partnerships with foreign persons as partners and U.S. tax exempt entities. This provision, which is expected to raise $24.8 billion over 10 years, is effective for services performed after Dec. 31, 2008.

The Act also offers tax relief for individuals

• IRA charitable rollover. If you are age 70½ or older, you can donate up to $100,000 from your individual retirement account (IRA) or Roth IRA to qualified public charities without including those distributions in your taxable income. This benefit was available under prior law in tax years 2006 and 2007. The current law extends this benefit to tax years 2008 and 2009.
• One-year stop-gap 2008 Alternative Minimum Tax (AMT) relief. The Act increases the AMT exemption to $46,200 for individuals and $69,950 for married couples filing jointly. The new bill also allows personal credits (i.e., dependent care credit, child tax credit, education credit, among others) against the AMT to minimize the number of taxpayers subject to the AMT. Special rules apply to taxpayers stung by the AMT due to exercising incentive stock options.
• Deduction for state and local sales taxes. Under the Act, residents of states that don't pay income tax are able to deduct sales tax paid during the year from their federal tax. It also allows residents of states that have income taxes to deduct the higher of state income tax paid or sales tax paid. The Act extends this provision through 2009.
• Property tax deduction extended. The standard deduction for real property taxes for nonitemizers has been extended through 2009.
• Three-year extension on home mortgage debt forgiveness. This provision allows limited exclusion from income on debt forgiveness of up to $2 million when related to a taxpayer's personal residence. This provision applies to discharges in the tax years 2010 through 2012.

New law equalizes tax-reporting standards

A provision in the Act equalizes the tax-reporting standards for tax preparers and taxpayers. The "more likely than not" threshold for preparers has now been replaced by "substantial authority" threshold.

In May 2007, Congress passed a law raising the tax-reporting standards for preparers to a higher level ("more likely than not") than that for taxpayers. The American Institute of Certified Public Accountants (AICPA) fought to equalize the tax-return reporting standards at the level of "substantial authority." Why? The difference in IRS standards created a potential for conflict of interest between tax preparers and their clients.

Good news for not-for-profits and charitable planning

The Act extends charitable giving provisions

The new bill provides a two-year extension on several popular charitable incentives that expired at the end of 2007:

• Enhanced charitable deduction for food inventory. Businesses can claim an enhanced deduction when they contribute food inventory. The Act also eliminates the percentage limitation for certain farmers' and ranchers' contributions made after Dec. 31, 2007 but before Jan. 1, 2009.
• C corporations earn a larger deduction for book contributions. Under the new law, C corporations will receive an enhanced charitable deduction when they donate books to schools, public libraries and literacy programs.
• Basis stock adjustment to S corporations contributing property. If an S corporation contributes to a charity, the amount of a shareholder's basis reduction in the corporation's stock will equal the shareholder's pro-rata share of the adjusted basis of the contributed property. (Under the previous law, the reduction was based on the pro-rata share of the contribution's fair market value.)
• Charitable contribution limits suspended. For charitable cash contributions dedicated to Midwest disaster relief efforts, the Act temporarily waives the deduction limits of 10% of a corporation's taxable income or 50% of an individual's adjusted gross income. This provision applies to contributions made beginning on the earliest applicable disaster date for all states and ending on Dec. 31, 2008.
• Increase in mileage rate for charitable use of vehicles. For taxpayers assisting in relief efforts related to Midwest disaster areas, the charitable mileage rate is 70% of the current standard business mileage rate of 50.5 cents per mile. The statutory charitable mileage rate is 14 cents per mile. This provision is applicable beginning on the disaster date and ending on Dec. 31, 2008.
• Income exclusion of mileage reimbursements for charity volunteers. Normally, reimbursements received for operating a personal vehicle for charity work in excess of the statutory 14 cents per mile is taxable to the recipient. Under the Act, these charitable mileage reimbursements are not considered taxable if related to relief efforts for Midwest disaster areas up to the amount of the standard business mileage rate. This provision applies for expenses incurred through Dec. 31, 2008.

Questions about the Act? Contact Mike Calahan at 312-980-2996 or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.