It's been a very busy year for the tax-writing committees in Congress. Five major Acts, each including significant tax law changes, have been enacted in 2008 - the Economic Stimulus Act, the Heroes Earnings Assistance and Relief Tax Act, the Heartland, Habitat, Harvest, and Horticulture Act, the Housing Assistance Tax Act and the Emergency Economic Stabilization Act, the last of which was signed into law just a few days before this article went to press. While the tax changes enacted this year affect both businesses and individuals, this article will focus only on provisions applicable to businesses.
ECONOMIC STIMULUS ACT OF 2008
Signed into law on February 13, 2008, the Economic Stimulus Act has become well known for granting stimulus rebate checks to individual taxpayers. Additionally, however, it provides investment incentives in the form of enhanced expensing and depreciation provisions for businesses who invest in new equipment in 2008. Under the Act, small businesses will be able to write off up to $250,000 of qualifying expenses in 2008. In addition, businesses will be able to deduct an additional 50% of the cost of certain investments in 2008.
Highlights of Tax Changes under the Act that Affect Businesses
The Act aims to stimulate business expenditures by amending for 2008 only the Section 179 limit on immediate expensing of otherwise depreciable costs from $128,000 to $250,000 and increasing the 2008 phase-out threshold from $510,000 to $800,000. Under the phase-out, the $250,000 ceiling is reduced by the amount by which the cost of Section 179 property placed in service during the tax year beginning in 2008 exceeds $800,000. Because the phase out is dollar-for-dollar, Section 179 expensing under the Act phases out completely if qualifying purchases exceed $1,050,000 during the tax year. As a result of this incentive, most small businesses, and even mid-sized businesses with moderate capital equipment needs, will be able to obtain a full deduction for the cost of business machinery and equipment purchased in 2008, thereby reducing their effective cost for those assets. Notably, there is no alternative minimum tax adjustment for property expensed under Code Section 179.
The Act also amends Code Section 168(k) by allowing a trade or business to depreciate an additional 50% of the cost of an asset acquired and placed into service during 2008. The types of property eligible for this bonus depreciation will be the same as those previously depreciable under Code Section 168(k), including tangible property that has a recovery period not exceeding 20 years, non-custom-made computer software, water utility property, and qualified leasehold improvement property. This bonus depreciation will be allowed under the alternative minimum tax.
HEROES EARNINGS ASSISTANCE AND RELIEF TAX ACT OF 2008
Signed into law on June 17, 2008, the Heroes Earnings Assistance and Relief Tax Act provides targeted tax relief for military members and their families, fully offset with tightened expatriation rules, a new rule requiring U.S. companies working under federal government contract to treat overseas employees as subject to employment taxes, and a higher failure to file penalty.
Highlights of Tax Changes under the Act that Affect Businesses
Tax changes under the Act that affect businesses relate to employment and retirement of military personnel. Regarding employment, the Act extends mental health parity requirements for services furnished after June 17, 2008 and through 2008. It permits unused health flexible spending account balances to be distributed to reservists called to active duty. It excludes state or local payments of bonuses to active or former military personnel or their dependants on account of such military personnel's service in a combat zone. Finally, the Act treats differential military pay as wages for income tax withholding purposes after 2008.
Regarding retirement, the Act requires tax-qualified retirement plans to provide that if a participant dies while performing qualified military service, his or her survivors would be entitled to any additional benefits that would have been provided had the participant resumed employment and then terminated employment on account of death. The Act also provides that retirement plans can permit individuals who leave for qualified military service, and cannot be reemployed on account of death or disability, to be treated as if they had been rehired as of the day before death or disability and then had terminated employment on the date of death or disability.
Additionally, the Act provides small employers a 20% differential wage payment credit in the calculation of wages for retirement plans and IRA purposes for employees who are on active military duty. Differential pay is payment that an employer voluntarily makes to an individual during any period of military service more than 30 days that represents all or a portion of the salary or wages the individual would have received if performing services for the employer. Under pre-Act law, differential pay was not considered to be wages for federal income tax withholding purposes, nor were qualified plans required to treat differential pay as compensation for the purposes of the limitations on benefits and contributions. Now differential pay is subject to withholding, must be treated as compensation for retirement plan purposes, and qualifies as compensation for purposes of the IRA contribution rules. Additionally, eligible small business employers that pay differential wages to qualifying employees are entitled to a new tax credit equal to 20% of up to $20,000 of differential pay to each qualifying employee during the tax year.
However, no deduction may be taken for that part of compensation that is equal to the credit, and the credit is subject to the rules for general business credits. The Act also permits active duty reservists to make penalty-free withdrawals from retirement plans. Finally, it permits a military death gratuity or amount received under the Servicemembers' Group Life Insurance program to be rolled over to a Roth IRA or Coverdell education savings account, notwithstanding the contribution limits that otherwise apply.
Finally, to offset the tax breaks, the Act treats foreign subsidiaries of U.S. companies performing services under a U.S. government contract as American employers for employment tax purposes. Under this new law, the domestic parent is jointly liable for employment taxes imposed on the foreign subsidiary. The new provision applies to services performed in calendar months beginning more than 30 days after June 17, 2008.
HEARTLAND, HABITAT, HARVEST, AND HORTICULTURE ACT OF 2008
Effective May 22, 2008, the Heartland, Habitat, Harvest, and Horticulture Act contains various tax changes including many specialized tax breaks for the farming industry, new and modified credits related to the production of certain fuels, and a change in large corporate estimated tax payments for the year 2012.
Highlights of Tax Changes under the Act that Affect Businesses
The Act creates a new tax credit for the development of cellulosic biofuels, which are biofuels produced from agricultural waste, wood chips, switch grass and other non-food feedstocks. This credit, available for fuel produced after 2008 and through 2012, is a nonrefundable income tax credit for each gallon of qualified cellulosic fuel production of the producer for the tax year. Additionally, the Act reduces the current 51 cent per gallon alcohol credit incentive for ethanol to 45 cents per gallon for 2009 and thereafter. This reduction is subject to an exception geared to ethanol production.
Under pre-Act law, corporate farmers and ranchers can deduct qualified conservation contributions up to 100% of taxable income. The Act extends this favorable tax treatment of capital gain property donated for qualified conservation through 2009. It also sets forth a one-year cut in the tax rate for a corporation's qualified timber gain for both regular tax and alternative minimum tax purposes. Additionally, it temporarily liberalizes rules for real estate investment trusts holding timber property.
Also related to the farming industry, the Act creates a new tax credit for agricultural chemical security expenditures by certain taxpayers doing business with farmers and ranchers. The new law provides retailers of agricultural products and chemicals and manufacturers, formulators, or distributors of certain pesticides a business tax credit for 30% of costs for the protection of such chemicals or pesticides. Such protection costs include employee security training and background checks, installation of security equipment, and computer network safeguards.
Notably, the Act also limits the amount of farming losses that a taxpayer may use to reduce other non-farming business income for certain taxpayers. Specifically, it provides that for tax years beginning after 2009, the farming loss of a non-C corporation taxpayer for any tax year in which any applicable subsidies are received will be limited to the greater of $300,000 ($150,000 for a married person filing a separate return) or the taxpayer's total net farm income for the prior five tax years. The Act also makes exchanges of stock in certain farm related entities, such as mutual ditch, reservoir, or irrigation companies, eligible for like-kind non-recognition treatment under Code Section 1031 for exchanges completed after May 22, 2008. Finally, it codifies the Internal Revenue Service requirement that the Commodity Credit Corporation must report market gain associated with the repayment of a Commodity Credit loan after December 31, 2006.
HOUSING ASSISTANCE TAX ACT OF 2008
Signed into law on July 30, 2008, the Housing Assistance Tax Act makes a number of tax changes including tax breaks for homebuyers and homeowners, relaxed requirements for tax-exempt bonds, eased alternative minimum tax rules, tax changes for businesses, and highly specialized changes effecting low-income housing and special investment vehicles called real estate investment trusts. The provisions of the Act are varied and provide for several tax changes that relate only to individuals, such as the refundable tax credit of up to $7,500 for first time homebuyers and the additional standard deduction allowed to homeowners for property tax if they do not itemize. However, many of the provisions also impact businesses.
Highlights of Tax Changes under the Act that Affect Businesses
The Act redefines tax-exempt use property for purposes of the rehabilitation credit for nonresidential real property. The Act increases from 35% to 50% the percentage of property that may be leased to a tax-exempt entity in a disqualified lease without requiring allocation of rehabilitation expenditures under the rehabilitation credit. Additionally, it provides that, in the case of a corporation with assets of at least $1 billion, the amount of any required installment of corporate estimated tax which is otherwise due in July, August, or September of 2012 will be 100% of that amount, thus repealing prior legislation that called for increased payments. The Act, however, increases to 117.75% the amounts due for installments in July, August, or September of 2013.
The Act also affects businesses with its tax changes regarding the alternative minimum tax. Often the alternative minimum tax can be a hazard because many tax breaks allowed for purposes of calculating regular taxes are disallowed for alternative minimum tax purposes, and some types of income exempt from regular tax are added back to arrive at tentative minimum tax. The Act includes several specialized relief measures for individuals and businesses. Under pre-Act law, the income tax credits for developing low-income housing and rehabilitating older buildings cannot be used to offset the alternative minimum tax. However, pursuant to the Act, low-income housing credits claimed for buildings put in service after 2007, and rehabilitation credits for post-2007 expenses, can both be used to offset the alternative minimum tax. Similarly, while typically interest on certain tax-exempt private activity bonds is taxed for alternative minimum tax purposes, the Act exempts special classes of bonds issued after July 30, 2008.
Next, directly affecting businesses, the Act allows corporations otherwise eligible for bonus depreciation pursuant to the Economic Stimulus Act to instead elect to claim additional research tax credits or certain minimum tax credits for tax years ending after March 31, 2008. Refundable tax credits are rare and afford taxpayers money even where they have no taxable income, no tax liability, and no payments of estimated tax. As previously explained, the Economic Stimulus Act allows bonus depreciation of 50% of the cost of property in addition to regular depreciation on the other 50% of the cost. This Act allows corporations to elect to forgo some of the bonus depreciation in favor of a refundable credit for old alternative minimum tax and increased research and development activities.
Under the Act, a corporation is effectively entitled to convert some of its old alternative minimum tax and research and development credits into refundable credits. However, the amount of the refundable credit is limited to the smaller of $30 million or 6% of the credits carried forward to the current year from taxable years beginning before January 1, 2006. Further, in order to take advantage of this credit, corporations must not only give up bonus depreciation, but also slow down annual depreciation allowances to the straight-line method. Therefore, it is important to note that this alternative choice is highly specialized and will require detailed analysis of a corporation's tax situation.
Also directly affecting businesses, the Act requires that after 2010, banks and online payment networks will have to file an information return with the Internal Revenue Service reporting the total dollar amount of credit and debit card payments a merchant receives during the year, along with the merchant's name, address, and taxpayer identification number. Under the Act, there are penalties for failing to file such returns and to provide related statements with respect to payment card transactions and third party network transactions. Reportable payment transactions will be subject to backup withholding beginning in 2012.
In relation to the foreign tax credit limitation, pre-Act law permits a worldwide affiliated group to be able to elect to have the taxable income of each domestic corporation that is a member of the worldwide affiliated group be determined by allocating and apportioning the interest expense of each member as if all members of the group were a single corporation. Under the Act, election to allocate interest expense on a worldwide basis is delayed until after 2010. The Act also makes changes in nonforeign affidavit requirements on transfers of interest in U.S. real property.
Other tax changes made by the Act relate specifically to real estate investment trusts ("REITs"), which are pass through entities that are allowed a deduction for dividends paid to shareholders. To qualify as a REIT, a corporation must satisfy a number of requirements, including a two-part income test. The Act amends the two-part income test by providing that passive foreign exchange gain is not counted as gross income for purposes of the 95% income test and real estate foreign exchange gain is not counted as gross income for purposes of the 75% income test. Additionally, the Act amends REIT assets tests and REIT prohibited transaction income rules. Finally, it provides that taxable REIT subsidiaries may hold health care facilities.
EMERGENCY ECONOMIC STABILIZATION ACT OF 2008
As we went to press, the Emergency Economic Stabilization Act of 2008 was enacted. The centerpiece of the Act, of course, is the financial bailout package, but it also includes a host of tax changes. Briefly, the Act:
- Raises the alternative minimum tax ("AMT") Exemption: The AMT exemption for individuals will be raised from $44,350 to $46,200 and from $66,250 to $69,950 for married couples filing jointly. The Act also allows certain personal credits to be used against the AMT.
- Impacts the Oil and Gas industry with multiple revenue raising tax increases on the industry: Specifically, the Act delays the tax deduction for domestic manufacturing activities of major American oil and gas companies, as well as tightens the rules by which oil and gas companies pay taxes on income earned overseas.
- Includes new tax benefits for production of renewable energy: The Section 45 renewable energy credit has been extended for one year for wind and refined coal facilities and two years for certain other facilities.
- Extends and Increases the R&D Credit: The popular business tax credit for research and experimentation has been extended for two years and increased from 12 percent to 14 percent.
- Extends and modifies the new markets tax credit and the exception under Subpart F of the tax code for active financing income through 2009.
- Imposes Limits on Executive Compensation: For any financial institution that sells troubled assets to the Treasury Department, the Act (1) caps tax deductions on compensation and bonuses to certain covered executives in excess of $500,000 and bans golden parachutes if sales to the Treasury exceed $3 million, (2) prohibits financial institutions that are absorbed by the federal government from providing golden parachutes or severance to their executives, and (3) provides a clawback for the financial institution to recover bonuses and incentives to executives that were based on inaccurate data. Under the Act, covered executives include chief executive officers, chief financial officers, and the highest three compensated officers of the applicable employer for the taxable year. It is important to note that a covered executive shall be treated as such with respect to an employer for all subsequent applicable tax years.
- Imposes Limits and Tightens Rules on Deferred Compensation for certain tax indifferent parties: The Act adds Section 457A to the Internal Revenue Code to prevent the deferral of compensation income where the service recipient does not give up a tax deduction as a result of such deferral. Section 457A recognizes that certain foreign entities are indifferent with respect to whether a deduction for compensation is deferred. Therefore, it provides that any compensation, which is deferred under a nonqualified deferred compensation plan of a nonqualified entity, shall be includible in gross income when there is no substantial risk of forfeiture of the rights to such compensation. There is no substantial risk of forfeiture when a person's rights to such compensation are not conditioned upon the future performance of substantial services by any individual. This rule will not apply to create any new limits on nonqualified deferred compensation arrangements of typical domestic business entities.
- Includes Reporting Requirements for Brokers: The Act requires securities brokers to report the cost basis for transactions to the Internal Revenue Service. The reporting requirement will apply to transactions of all stock, debt, commodities, derivatives, and other items specified by Treasury.
- Expands Disaster Relief Benefits. The Act provides a new tax relief package for victims of all Federally-declared disasters occurring after December 31, 2007 and before January 1, 2010. Included in the tax relief is eased loss deduction rules, a new business write-off for demolition, cleanup and repair, a five year carryback for casualty losses or qualified disaster expenses, and increased expensing dollar limits.
Unless you are affected directly by some of the major provisions of the Emergency Economic Stabilization Act of 2008, no individual tax change Congress has wrought so far this year is especially momentous, but depending on the type of business you are in several smaller changes could add up to a significant impact. It makes sense to review them all now to see where you come out and whether current planning could increase your potential bottom line (especially with respect to Section 179 expensing, bonus depreciation and the conversion of alternative minimum tax and R&D credits into new refundable credits). A review is also warranted to determine whether several new compliance requirements pertain to your business.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
|
