Rescue bill extends tax breaks, expands energy credits, and more
Tax provisions attached to the Emergency Economic Stabilization Act of 2008, and signed into law by President Bush on October 3 will result in over 290 changes to the Internal Revenue Code, according to a CCH Tax Briefing. In addition to extending a long list of tax breaks for individuals and businesses, the bill contains provisions directly related to the financial bailout and extends and expands energy credits. The most significant extension, which raises deduction limits on the Alternative Minimum Tax (AMT), is for 2008 only; the bill also modifies some AMT requirements.
Internal Revenue Service Commissioner Douglas H. Shulman congratulated Congress for passing the AMT patch and tax extenders in time for the IRS to handle the changes on its tax forms and computer systems. "Timely passage of the AMT and extenders provisions is a great outcome for the nation's taxpayers. This gives the Internal Revenue Service enough time to prepare for the upcoming tax season," he said in a written statement.
New tax provisions associated with the Troubled Asset Relief Program (TARP) and the financial crisis address executive compensation and Fannie and Freddie Stock losses.
- Executive compensation
The rescue package limits the deductibility of compensation under Code Sec. 162(m) to $500,000 for CEOs, CFOs and other executives of companies participating in TARP auctions. In addition, companies participating in TARP auctions must agree to limit golden parachute payments to standards that will be set by the Treasury Department. Amounts in excess of these standards will be subject to excise tax.
- Fannie and Freddie stock losses
Community banks and other eligible financial institutions may treat their Fannie Mae and Freddie Mac losses as ordinary losses. This treatment applies to preferred stock that was held on September 6, 2008 or sold or exchanged on or after January 1, 2008 and before September 7, 2008. This treatment is not available to individuals, CCH says.
The bill extends the Mortgage Forgiveness Debt Relief Act exclusion of all or part of excess mortgage debt under certain circumstances, CCH reports.
Under the new law, AMT exemption amounts for 2008 are 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. In 2007, a temporary one-year fix provided for $66,250 in exemptions for married couples and $44,350 for individuals. Without the change in the current law, the exemptions would have reverted to $45,000 for couples and $33,750 for individuals. The AMT provision is in effect for one year only.
The law removes limits in the AMT on taking personal credits, including the dependent care credit and education tax credits, against regular tax liability. It also provides relief to taxpayers whose worthless stock options triggered an AMT liability. The law will abate liability and interest and penalty owned on the unpaid amounts.
Expanding on a trend in recent legislation, Congress has "made fairly significant progress in the renewable, sustainable energy area," said Clint Stretch, managing principal of tax policy at Deloitte Tax in Washington, in a New York Times report. "It does look like a hodgepodge, but Congress is saying that the tax system should be a part of a solution, both with respect to carbon and more generally."
The new law expands the definition of some renewable energy sources eligible for tax incentives, extends some credits for as long as eight years, and ends or modifies caps on others. Biodiesel fuel that is imported and immediately sold is no longer eligible for tax incentive retroactive to May 15, 2008.
CCH's analysis of the new legislation's energy provision identifies the most significant provision for individuals as the $500 credit for the purchase of residential energy property. Eligible improvements include insulation, windows, and exterior doors.
Among the many energy credits and extensions added to the bill are:
- Code Sec 25(d) residential energy efficient property credit is extended through 2016
- Sec. 179(d) credit for energy efficient commercial buildings extended through December 31, 2013
- Cap for solar electric investment is removed
- Credit for residential small wind investments, capped at $4,000
- Credit for geothermal heat pumps, capped at $2,000
- Credits for energy efficient improvements to home are extended through 2009
- Credits for plug-in cars when they become available
- Credit for coal gasification projects
- Alternative fuels credit
Tax incentives for individuals extended through December 31, 2009 by the Act are:
- State and local sales tax deduction
- Higher education tuition deduction
- Teachers' classroom expense deduction
- Tax-free distributions from IRAs for charitable purposes
- Treatment of certain dividends of regulated investment companies
- Estate tax look-through for RIC stock held by nonresidents
- Qualified investment entities treatment
The additional standard deduction for real property taxes for non-itemizers has been extended through 2009. This will increase the standard deduction by $1,000 to $11,900 for non-itemizing joint filers, and by $500 to $5,950 for non-itemizing individuals and $8,500 for non-itemizing heads of household.
Child tax credit
The income floor for the child tax credit, which had been indexed, has been lowered from $12,050 to $8,500 (the original floor was $10,000). The credit is refundable to the extent of 15 percent of the taxpayer's income in excess of the floor amount.
Business tax breaks
Two business incentives that could have wide application are the research tax credit and the new markets tax credit. The research tax credit is extended to amounts paid in 2007 or 2008. The new market tax credit, which is extended through December 31, 2009, is one of the few incentives in the Tax Code that encourages taxpayers to invest in or make loans to small businesses in economically distressed areas, CCH says. Extending this credit may help businesses to obtain financing during this credit crisis.
Many of the business tax incentives applied to specific industries or activities but the bill also extended credits for:
- Leasehold and restaurant improvements
- Charitable contributions
- Hurricane Katrina relief
The new law is expected to generate more than $43 billion in revenue, CCH reports. Broker basis reporting has been expanded and a loophole that protected foreign deferred compensation has been closed. The foreign deferred compensation provision will produce an estimated $25.1 in revenue.
Other offset measures in the bill:
- Cap on Code Sec.99 deduction
- Tighter rules for Foreign tax credit for oil and gas companies
- Surtax of .02 percent on FUTA is extended
- Oil Spill Liability Trust Fund extended through 2017
Return preparer standard
Small Business and Work Opportunity Tax Act of 2007, passed by Congress in May 2007, raised the tax return reporting standards for undisclosed, non-tax shelter transactions for tax return preparers to a strict, "more likely than not" standard, a level higher than that required of taxpayers.
The new law retains the "more likely than not" return preparer standard for tax shelters and Section 6662A reportable transactions, but replaces the standard with a "substantial authority" standard for other transactions. The law states that, "No penalty shall be imposed under this subsection if it is shown that there is reasonable cause for the understatement and the tax return preparer acted in good faith."
Barry C. Melancon, president and CEO of the AICPA who had urged passage of the extenders legislation, praised the passage of the provision that would equalize tax return reporting standards for tax preparers. "AICPA members last year quickly zeroed in on how important it is for Congress to establish equal reporting requirements for taxpayers and tax preparers," Melancon said, according to MarketWatch. "We appreciate the Senate's understanding and the fact that senators acted promptly to correct conflict of interest problems that can come up when the IRS reporting requirements aren't the same."
Evolution of the Emergency Economic Stabilization Act of 2008: