Fall 2008

EMERGENCY ECONOMIC STABILIZATION ACT ADDS TAX RELIEF TO FINANCIAL RESCUE INITIATIVE

On October 3, 2008, President Bush signed the Emergency Economic Stabilization Act of 2008 (“the Act”), which includes over $150 billion in tax relief for businesses and individuals in addition to the much-publicized financial markets rescue package introduced to help stabilize the financial sector.

The majority of the provisions offer immediate tax relief for the 2008 and 2009 tax years. In light of these changes, businesses and individuals should act now to review their tax planning strategies in order to maximize current-year tax savings before year-end.

TAX INCENTIVES FOR INDIVIDUALS
The Act extends a number of popular tax credits and deductions for individuals, many of which have been renewed regularly over the last several years. Some of these extenders include the alternative minimum tax (AMT) patch, the state and local sales tax deduction and the tax-free consideration of IRA distributions made for charitable purposes.

Alternative Minimum Tax Patch
The Act includes an AMT patch for the 2008 tax year, designed to reduce the impact of the AMT on millions of individual taxpayers. The revised 2008 exemption amounts are as follows:

Under the Act, taxpayers can take nonrefundable personal credits to reduce their AMT liability as well as their regular tax liability. The Act also abates the AMT liability, including interest and penalties, associated with unpaid taxes resulting from the exercise of worthless incentive stock options before 2008.

State and Local Sales Tax Deduction
The Act extends the state and local sales tax deduction, originally enacted under The American Jobs Creation Act of 2004, for two years through December 31, 2009. The deduction allows individuals the option of deducting state and local sales taxes instead of state and local income taxes.

Higher Education Tuition Deduction
The Act extends the above-the-line deduction for qualified higher education tuition expenses through December 31, 2009. Eligible taxpayers with an adjusted gross income (AGI) of no more than $65,000 ($130,000 for joint filers) can deduct the costs of qualified higher education expenses for themselves, a spouse, or a dependent up to $4,000. The deduction is capped at $2,000 for eligible taxpayers with an AGI greater than $65,000 ($130,000 for joint filers), but less than $80,000 ($160,000 for joint filers).

Additional Standard Deduction for Real Property Taxes
For taxpayers who do not itemize deductions, the Act extends the up to $500 ($1,000 for joint filers) additional standard deduction for real property taxes through December 31, 2009. Enacted earlier this year as part of The Housing Assistance Tax Act of 2008, the additional deduction was originally only available for 2008.

Child Tax Credit
The Act expands the child tax credit by lowering the income floor for the credit from $12,050 down to $8,500. The credit will now be refundable up to 15 percent of the taxpayer’s earned income in excess of $8,500.

Teacher Classroom Expense Deduction
For teachers and education professionals, the Act extends through December 31, 2009 the above-the-line deduction of up to $250 to cover the cost of eligible out-of-pocket classroom expenses, such as books, supplies, software and equipment.

Tax-Free IRA Distributions for Charitable Purposes
Under the Act, taxpayers can continue to make tax-free distributions from individual retirement accounts (IRAs) of up to $100,000 for charitable purposes through December 31, 2009.

Mortgage Forgiveness Debt Relief
The Act extends the exclusion of forgiven mortgage debt from taxable income, enacted under The Mortgage Forgiveness Debt Relief Act of 2007, through 2012. Home equity loans are not included in this exclusion.

Additional Incentives for Individuals
Some of the other individual tax incentives included in the Act are as follows:

• Extension of interest-related dividend treatment of certain Regulated Investment Company (RIC) dividends
• Extension of estate tax look-through for certain RIC stock held by nonresidents
• Extension of “qualified investment entity” treatment of RICs

TAX INCENTIVES FOR BUSINESSES
The Act revises and extends several tax credits and incentives for businesses, including a revision of the research tax credit; enhanced depreciation for leasehold, restaurant and retail improvements; and an extension of the new markets tax credit.

Revised Research Tax Credit
The Act extends the research tax credit through December 31, 2009, and modifies the credit by repealing the alternative incremental calculation method and increasing the percentage used for the alternative simplified method to calculate the credit.

Leasehold, Restaurant and Retail Improvements
The Act extends the 15-year accelerated cost depreciation available for qualifying leasehold and restaurant improvements made by leased establishments, as well as owner-occupied businesses and restaurants, through December 31, 2009. The Act also authorizes a 15-year cost recovery period for eligible improvements made to retail locations.

New Markets Tax Credit
The Act extends the New Markets Tax Credit through 2009. The credit is designed to help small businesses in economically distressed areas obtain financing.

Charitable Contributions
The Act extends, through 2009, the enhanced deductions available to businesses for contributions of food to charitable organizations, and books and computer equipment to qualifying schools. The Act also continues to suspend the limitations on charitable food contributions made by eligible farmers or ranchers before January 1, 2009.

The Act also extends, through 2009, the special tax treatment that allows S corp shareholders to consider their pro-rata share of charitable deductions when making charitable contributions of qualifying property, even when these deductions would exceed the shareholder’s adjusted basis in the S corp.

Additional Incentives for Businesses
Some of the other business tax credits and incentives included in the Act are as follows:

• Expensing option for brownfields environmental remediation costs
• Extension of cost recovery period for motorsports entertainment complexes
• Railroad track maintenance credit
• Expensing option for mine safety equipment and mine rescue training credit
• Section 199 deduction for qualifying domestic production activities in Puerto Rico

ENERGY TAX INCENTIVES
The Act also includes the Energy Improvement and Extension Act of 2008, which contains several provisions that extend energy-efficiency and energy property tax incentives to both businesses and individuals.

Qualified Energy Conservation Bonds
The Act introduces a new tax credit to encourage investment in qualified energy conservation bonds for capital expenditures. The credit is designed to reduce energy consumption in public buildings, implement green community programs, develop alternative and renewable energy sources, and promote mass commuting facilities.

Energy-Efficient Improvements to Existing Homes
The Act extends the energy-efficient existing homes tax credit through 2009, and classifies energy-efficient biomass fuel stoves as energy-efficient property eligible for a $300 consumer tax credit.

Energy-Efficient Improvements to New Homes
The Act extends, through 2009, the credit that contractors receive for the construction of energy-efficient new homes that achieve a 30 percent or 50 percent reduction in heating and cooling energy consumption relative to a comparable dwelling. The credit is $1,000 for new homes that meet the 30 percent efficiency standard and $2,000 for new homes that meet the 50 percent standard.

Energy-Efficient Commercial Buildings Deduction
The Act extends through 2013 the energy-efficient commercial buildings deduction for the installation cost of qualified energy-efficient property in commercial buildings. The deduction allows up to $1.80 per square foot for buildings that achieve 50 percent energy savings through energy and power cost reductions for the building’s heating, cooling, ventilation, hot water and interior lighting systems.

Energy-Efficient Appliance Credit
The Act expands the tax credit available to manufacturers who produce energy-efficient dishwashers, clothes washers and refrigerators in the United States, and extends the credit through 2010.

Accelerated Depreciation for Smart Meters and Smart Grid Systems
The Act allows taxpayers to recover the cost of smart electric meters and smart electric grid equipment over a 10-year period unless the property already qualifies for a shorter recovery schedule.

Qualified Green Building and Sustainable Design Project Bond
The Act allows qualified green building and sustainable design project bonds to be issued through the end of 2012.

Renewable Energy Incentives
The Act extends the credit for producing electricity from qualified wind facilities through December 31, 2009, the credits for producing electricity through biomass and other qualifying renewable sources through September 30, 2011, and the credit for solar energy, fuel cell and microturbine property through December 31, 2016. The Act also redefines some renewable energy sources to allow more energy producers to qualify for these incentives.

Transportation Fringe Benefit Exclusion
The Act also allows taxpayers to exclude from their income some employer-provided transportation fringe benefits, such as transit passes and van pooling. Moreover, the Act extends this treatment to taxpayers who commute by bicycle, granting an exclusion of $20 per month effective for tax years beginning after December 31, 2008.

Additional Energy Incentives
Some of the other energy tax credits and incentives included in the Act are as follows:

• New tax credits for the creation of advanced coal electricity projects and coal gasification projects
• CO2 capture credit
• Plug-in electric drive vehicle credit
• Clean renewable energy bonds
• Credit for coal used in steel industry fuel
• Extension and modification of alternative fuels credit
• Extension and expansion of the alternative refueling stations credit
• Incentives for idling reduction units and advanced insulation for heavy trucks
• Expansion of allowance for cellulosic biofuels property
• Energy-efficient appliance credit
• Percentage depletion for marginal wells
• Refinery expensing
• Black Lung Disability Trust excise tax on coal
• Publicly traded partnership income treatment of alternative fuels
• Non-hydrogen alternative fuel refueling property

TEMPORARY DISASTER RELIEF
In addition, the Act provides significant tax relief to storm victims in presidentially declared disaster areas.

National Disaster Relief
The Act allows taxpayers affected by qualifying natural disasters between December 31, 2007 and January 1, 2010 to claim the following targeted tax breaks:

• A special qualified disaster property depreciation
• Increased expensing for qualified disaster expenses
• Enhanced net operating loss carryback

Hurricane Katrina Relief Extension
The Act extends the Work Opportunity Tax Credit for employers affected by Hurricane Katrina and the increased rehabilitation credit for structures in the Gulf Opportunity Zone through 2009.

Hurricane Ike Relief
The Act provides temporary tax-exempt bond financing and low-income housing tax relief targeted to the parts of Louisiana and Texas included in the Hurricane Ike Disaster Area declared by President Bush on September 13, 2008. Victims of Hurricane Ike may also be eligible for the national disaster relief provisions outlined above.

Midwestern Disaster Area Relief
For parts of Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, and Wisconsin included in a presidentially declared disaster area between May 20, 2008 and August 1, 2008, the Act contains a number of tax incentives, to include the following:

• Increased expensing for demolition, environmental remediation and clean-up costs
• Enhanced depreciation for qualified property, education and housing tax benefits
• Increased standard mileage rate for charitable vehicle use

REVISED RETURN PREPARER STANDARD
The Act amends The Small Business and Work Opportunity Tax Act of 2007 to replace the “more likely than not” standard for undisclosed, nonabusive tax positions in Section 6694(a) with the “substantial authority” standard. This change is retroactive to the effective date of The Small Business and Work Opportunity Tax Act of 2007, and eliminates the need for the IRS to issue final regulations on the “more likely than not” standard under Section 6694(a) later this year. The “more likely than not” standard still applies for tax shelters and reportable transactions.

OFFSETS
The Act includes over $43 billion in revenue provisions, partially offsetting the cost of the tax extensions and incentives by increasing taxes in certain instances.

Adjusted Basis Reporting Requirement
Under the Act, brokers will now be required to report the adjusted basis of publicly traded securities (such as stock, bonds, debentures, commodities, derivatives and other financial instruments) when reporting sales transactions. This report must indicate whether the gain is short-term or long-term, and is effective for stock acquired in 2011, mutual funds in 2012, and other securities in 2013.

Foreign-Owned Nonqualified Deferred Compensation
The Act imposes a tax on foreign-owned nonqualified deferred compensation plans, unless the compensation is deferred within 12 months or less of the vested year. Partnerships with foreign partners are also subject to the tax. The tax applies to compensation for services performed after 2008.

Domestic Production Activities Deduction Cap
The Act caps the Section 199 domestic production activities deduction at six percent for oil-related qualified production activities income (QPAI), such as production, refining, processing, and transportation or distribution income.

Foreign Oil and Gas Extraction Income Tax Credit Limitation
The Act eliminates the distinction between foreign oil and gas extraction income (FOGEI) and foreign oil-related income from transportation and refining beginning in 2009 by applying the Section 907 FOGEI foreign tax credit limitation to income generated by oil and gas production and sales.

Oil Spill Liability Trust Fund Tax
The Act extends the oil spill liability trust fund tax through 2017, increasing the tax from five cents per barrel to eight cents per barrel through 2016 and to nine cents per barrel in 2017. The Act removes the provision that set the maximum size of the fund at $2.7 billion.

Unemployment Surtax
The Act extends, through 2009, the 0.2 percent surtax on Federal Unemployment Tax Act (FUTA) taxes. The FUTA tax is 6.2 percent of the first $7,000 wages paid to each employee.

CONCLUSION
This bulletin provides only a brief summary of the many tax extenders and incentives contained in the Act. Contact your local CB&H tax professional today to ensure that you and your business can begin to receive the maximum possible benefit of these provisions for the current tax year.

FOR MORE INFORMATION, PLEASE CONTACT:
Brooks Nelson, Partner
bnelson@cbh.com
1.800.849.8281

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