Economic Stimulus Act of 2008

The Economic Stimulus Act of 2008 was signed into law by President Bush on February 13, 2008. The new law provides credits for individuals to either be paid as a rebate during 2007 or to be taken as a tax reduction on 2008 income tax returns. In addition, the Act provides increased §179 limits and 50% §168(k) up-front depreciation deductions for 2008. The following is a summary of the changes made by the Economic Stimulus Act of 2008.

REBATE CREDIT

The Act provides for credits against the 2008 Federal income tax liabilities of certain qualifying individuals. However, the credit is to be calculated by the IRS based upon each qualifying individual's 2007 income tax return and rebated to the individual as soon as feasible (it is anticipated that IRS may begin mailing rebate checks as early as May). When the individual prepares his or her 2008 income tax return, the credit is calculated on the 2008 return and reduced by any rebate received. Therefore, if the credit on the 2008 return is greater than the rebate received, the additional credit is taken on the 2008 return. However, if the rebate was greater than the credit calculated on the 2008 return, the individual is not required to repay the excess. Because the credit allowed by the 2008 Act may be a rebate, a credit on the 2008 return, or both, we refer to the credit as a rebate credit.

Note! Since the rebate is calculated based upon the 2007 return information, the rebate cannot be calculated until the 2007 return is filed. In addition, no rebates will be made after December 31, 2008. Also, rebates may be offset by back taxes, past-due child support, federal student loans, etc. No interest will be paid on the rebate amounts.

One half of any rebate issued with respect to a 2007 joint return is deemed to be issued to each individual. Thus, if taxpayers filed a joint return for 2007 and received a rebate, but were divorced or filed separate returns for 2008, each individual will take into account half of the rebate when reducing the credit allowed for 2008.

The following is a summary of the rules for determining who will get a rebate credit and the amount of the rebate credit.

1. Individuals That Do Not Qualify. A qualified individual does not include an individual for whom another person is "allowed" to claim a personal exemption deduction. In addition, nonresident alien individuals do not qualify for the rebate credit.

2 Qualifying Individuals. Qualifying individuals receive a basic rebate credit equal to the greater of:

a. Net tax liability up to $600 ($1,200 on a joint return), or

b. $300 ($600 on a joint return) if the individual has either i) at least $3,000 of "qualifying income" or ii) net income tax liability of at least $1 and gross income greater than $8,950 for singles, $17,900 for joint filers, $8,950 for married individuals filing separately, and $11,500 for a head of household;

"Net Income Tax Liability." Net income tax liability means the excess of a) the sum of the individual's regular tax liability and the alternative minimum tax (AMT) for the tax year, over b) the sum of all nonrefundable credits other than the child tax credit. Net income tax liability isn't reduced by the recovery rebate credit itself or by any refundable credit.

"Qualifying Income" means earned income; social security benefits; and any veteran's benefits received under chapter 11 (compensation for service-connected disability or death), chapter 13 (dependency and indemnity compensation for service-connected deaths), or chapter 15 (pension for non-service-connected disability) of title 38, U.S. Code. Accordingly, taxpayers receiving only social security benefits, disabled veterans receiving disability benefits, and survivors of disabled veterans may qualify for a rebate. Planning Alert! As explained at item 6. below, a return must be filed for 2007 for individuals to receive the rebate. Therefore, we should file returns for individuals qualifying for the rebate even though they are not required to file under the normal rules.

"Earned Income" has the meaning outlined in §32(c)(2) for purposes of the earned income credit, except that it includes combat pay and doesn't include net earnings from self-employment which are not taken into account in computing taxable income.

3. $300 Qualifying Child Rebate Credit. Individuals qualifying for a rebate credit at item 2. above, are allowed an additional rebate credit of $300 for each qualifying child of the individual.

"Qualifying Child" means a qualifying child of the taxpayer, as defined for purposes of the dependency exemption by §152(c), who hasn't attained age 17 by the end of 2008. Generally, a qualifying child must have the same principal place of abode as the taxpayer for more than one-half the tax year, satisfy a relationship test (i.e., be the taxpayer's son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or descendant of any such individual), and must not have provided more than half of his or her own support for the year. A child who is not a citizen, national, or resident of the U.S. can't be a qualifying child.

4. Phase-Out of Rebate Credit. The sum of the rebate credits at items 2. and 3. above, are reduced as AGI increases above certain thresholds. The total credits are reduced by 5% of the taxpayer's AGI in excess of $75,000 ($150,000 on a joint return). Therefore, taxpayers lose $1 of rebate credit for every $20 of AGI in excess of the $75,000 or $150,000 thresholds. For example, for joint filers with no children who would otherwise get the maximum $1,200 basic credit, the credit would be lost once AGI reaches $174,000 [5% × ($174,000 - $150,000) = $1,200]. For a single filer with no children who would otherwise get the maximum $600 basic credit, the credit would be lost once AGI reaches $87,000 [5% × ($87,000 - $75,000) = $600].

5. No Credit Unless Valid Social Security Number. No rebate credit is allowed to an eligible individual (or individuals in the case of joint returns) who do not include a valid identification number on his or her tax return for the tax year. Furthermore, a qualifying child isn't taken into account in determining the amount of the credit unless a valid identification number for the child is included on the return. A "valid identification number" means a social security number issued to an individual by the Social Security Administration (SSA). A taxpayer identification number (TIN) issued by the IRS is not a "valid identification number." This rule is intended to deny the basic credit and qualifying child credit to illegal immigrants.

6. IRS News Release 2008-18. On February 13, 2008, the IRS issued News Release 2008-18 providing additional information concerning the rebate credit. Among other things, the News release explains that:

• Must File Return To Get Rebate. IRS says that individuals must file a return (even if not otherwise required to file) in order to obtain the rebate. Planning Alert! We should file a 2007 return for individuals entitled to a rebate, but not otherwise required to file. For example, low-income individuals who have earnings above $3,000 but do not have a regular filing requirement must file a 2007 tax return to receive their rebate. Similarly, Social Security recipients, certain Railroad retirees, and those who receive the veterans' benefits mentioned above must file a 2007 return in order to notify the IRS of their qualifying income.
  

• Note! IRS points out that Line 20a of Form 1040 and Line 14a of the Form 1040A are designated for Social Security. To qualify for the rebate, these lines should also be used to include any qualifying Railroad Retirement or veterans' benefits.

• Direct Deposit. The rebate will be direct deposited for individuals selecting the direct deposit option on their 2007 return.

• IRS Notices Concerning Rebates. Most individuals will receive two notices from the IRS. The first general notice from the IRS will explain the stimulus program. The second notice will confirm the recipients' eligibility, the payment amount and the approximate time table for the payment. Planning Alert! We should notify clients that they will need to save this second notice so we can use the notice (verifying the amount of the rebate) to prepare their 2008 tax return next year.

7. Additional Information. Please go to the IRS web site www.irs.gov and click on "Rebate Questions?" for the latest IRS releases concerning the rebate program.

INCREASED 179 DEDUCTION FOR TAX YEARS BEGINNING IN 2008

For tax years beginning in 2008, the Act increases the maximum §179 deduction from $128,000 to $250,000. In addition, the $250,000 deduction is reduced by the amount by which the cost of qualifying §179 property placed-in-service during the tax year beginning in 2008 exceeds $800,000 (previously $510,000).

50% UP-FRONT §168(k) DEPRECIATION DEDUCTION FOR 2008

The Act reinstates the 50% §168(k) deduction for qualifying property acquired and placed in service during calendar year 2008. Generally, except for the effective dates, the rules applicable to the previous §168(k) depreciation deduction for property placed-in-service before 2005 apply under the reinstated rules. To qualify for the 50% §168(k) deduction, the property must meet the following requirements:

1. Qualifying Property. Generally, the following property may qualify for the 50% §168(k) deduction:

a. Property subject to the MACRS depreciation rules with an applicable recovery period of 20 years or less. This includes MACRS property that is 3-year, 5-year, 7-year, 10-year, 15-year or 20-year property;

b. Water utility property as defined in section 168(e)(5);

c. Computer software as defined in §167(f)(1) that is depreciable over 36 months;

d. Qualified leasehold improvement property defined in section 168(k)(3) (i.e., certain interior improvements to a leased commercial building).

2. Original Use Must Begin After 2007. To qualify for the 50% 168(k) deduction, the original use of the property must begin with the taxpayer after 2007. For purposes of this requirement, "original use" means the first use to which the property is put, whether or not that use corresponds to the use of the property by the taxpayer. In other words, used property does not qualify for the §168(k) deduction.

3. Must Be Acquired By The Taxpayer After 2007 And Before 2009. To qualify for the §168(k) deduction, the property must be a) acquired by the taxpayer after 2007 and before 2009, but only if no written binding contract for the acquisition was in effect before 2008, or b) acquired by the taxpayer under a written binding contract which was entered into after 2007 and before 2009. For a taxpayer manufacturing, constructing or producing property for the taxpayer's own use, property generally qualifies if the taxpayer begins manufacturing, constructing, or producing the property after 2007 and before 2009.

4. Placed-In-Service Requirement. To be qualified property, the property generally must be placed-in-service by the taxpayer after 2007 and before 2009. However, the following property is qualified property if it is placed-in-service before 2010:

a. Property With Long Production Period. Property that: i) is qualifying property, the original use of which commences after 2007, and which is acquired within the qualifying periods described at item 3. above; ii) has a recovery period of at least 10 years or is "transportation property;" iii) is subject to §263A (i.e., the uniform capitalization rules (UNICAP)); and iv) that has an estimated production period exceeding 1 year and a cost exceeding $1,000,000. Note! Property qualifying under this transition rule is eligible for 50% bonus depreciation only to the extent of the adjusted basis attributable to the manufacture, construction, or production before 2009.

b. Certain Aircraft. An aircraft which i) is not transportation property (other than for agricultural or firefighting purposes), ii) which is purchased and on which such purchaser, at the time of the contract for purchase, has made a nonrefundable deposit of the lesser of A) 10 percent of the cost, or B) $100,000, and iii) which has A) an estimated production period exceeding 4 months, and B) a cost exceeding $200,000.

5. §179 Depreciation Taken Before §168(k) Depreciation. The 50% additional depreciation deduction under §168(k) is calculated using the basis of the asset after the §179 deduction. For example, assume that on September 1, 2008, a calendar year business purchases $400,000 of computer equipment (5-year property), which represents the only §179 property purchased in 2008. Assume further that the computer purchases qualify for the maximum §179 deduction, the 50% §168(k) depreciation deduction, and the normal MACRS depreciation deduction. The total deductions in 2008 on the computer purchases would be $340,000, computed as follows: i) a §179 deduction of $250,000, plus ii) additional 50% first year depreciation of $75,000 on the remaining basis ([$400,000 - $250,000] x 50%), plus iii) $15,000 of MACRS depreciation ($75,000 x 20% [using half-year convention and 200% declining balance]).

6. §168(k) Allowed For Both AMT And Regular Tax. The 50% 168(k) deduction is allowed for both regular tax and AMT purposes.

7. May Elect Out. As under the prior rules for §168(k), taxpayers may elect to forego the §168(k) deduction. Generally, the IRS requires the election out to be filed by the due date of the return including extensions. In addition, IRS may allow the election out to be filed before the end of the maximum extension period, even where no extension was filed. The election out may be made for any class of property for any tax year, and, if made, applies to all property in that class placed-in-service during that tax year.

INCREASED FIRST-YEAR DEPRECIATION LIMITATION FOR PASSENGER AUTOS

The Act provides that the first-year depreciation limitation under §280F for passenger autos that qualify for the 50% §168(k) depreciation deduction, is increased by $8,000.

OTHER DEVELOPMENTS

FUEL TAX CREDIT FORM 4136 CANNOT BE FILED ELECTRONICALLY UNTIL MARCH 3, 2008

The AICPA reports that they have learned from recent discussions with the IRS, that Form 4136, Credit for Federal Tax Paid on Fuels, cannot be filed electronically until March 3, 2008. The AICPA says that e-filed returns submitted before March 3 will be rejected and given five days after March 3 in which to make corrections, so hold off hitting send or file a paper return. This delay is of particular significance to farmers who are not subject to penalties for underpayment of estimated fourth quarter taxes if they timely file and pay their taxes by March 1.