Sander & Associates, P.A.

2008 Tax Law Changes
There have been a LOT of recent changes to the tax law in the past few months.  We have seen the passing of the Economic Stimulus Act of 2008, Farm and Military Acts, and the Housing Assistance Tax Act of 2008.  This summary reflects some of the significant business and individual changes enacted by recent legislation

The limit on expensing assets is climbing to $250,000 for 2008, up from $128,000.  In addition, the full $250,000 expensing can be claimed until $800,000 if assets are placed into service, up from $510,000.

In addition, firms can take 50% bonus first-year depreciation on new assets put in use in 2008.  The balance of the cost is recovered by normal depreciation rules.  Smaller companies can first claim expensing and then use the 50% bonus.  If used assets are bought, no 50% write-off is allowed.

Autos and light trucks also benefit from the above rules if they are used for business.  The maximum first-year write-off for them is increased to $10,960, up from $3.060 for 2007.

The Special 50% bonus depreciation is available for heavy SUV’s with a loaded weight over 6,000 pounds.  Here’s an example:  Your firm buys a new $50,000.  The business can expense $25,000.  One-half of the remaining $25,000 cost, $12,500, is bonus depreciation.  And 20% of the $12,500 balance is deducted as regular depreciation.  The total first-year write-off is $40,000, assuming 100% business use.  That’s 80% of the total cost!

The standard mileage allowance for owned or leased autos (including vans, pickups or panel trucks) has been increased 8¢ from 50.5¢ to 58.5¢ per business mile for travel from July 1, 2008 to Dec. 31, 2008 to better reflect the real cost of operating an auto in this period of rapidly rising gas prices. The rate can also be used by employers to reimburse tax-free under an accountable plan employees who supply their own autos for business use. Additionally, an employee's personal use of lower-priced company vehicles during 2008 may be valued at 58.5¢ per mile if certain conditions are met. The rate for using a car to get medical care or in connection with a move that qualifies for the moving expense has also increased 8¢ for the last half of 2008 from 19¢ to 27¢ per mile.

1. The Service so far has signed up 33 states to share data from payroll tax exams, which will likely mean thousands of new audit leads using state records.  There’s another twist: Federal and state agents will train together and even conduct joint exams in some cases.
   
2. To better pinpoint audit leads and lessen chances for no-change exams the Service has enhanced its matching programs.  An electronic matching system lets the IRS spot businesses issuing 1099 forms with payments of $25,000 or more to at least five workers with no other income sources. 
   
3. Audit leads from workers:  IRS will soon get the first wave of Forms 8919, which taxpayers can file with their 2007 tax returns, to tell IRS that they believe their employers incorrectly classified them as contractors.  A flood of these forms is likely because filing the 8919 allows an individual to avoid paying self-employment tax to the Service.

(1) The IRS issued final regulations providing guidance on miscellaneous HSA comparability requirements. HSAs aren't subject to nondiscrimination rules restricting the amount of benefits provided to highly compensated employees. Instead, if an employer decides to fund HSAs, it must make “comparable” contributions to all comparable participating employees' HSAs. The guidance addresses situations where an employee has not established an HSA by Dec. 31 of a year and where an employer accelerates contributions for the calendar year for employees who have incurred qualified medical expenses.

(2) The IRS released the annual inflation-adjusted contribution, deductible, and out-of-pocket expense limits for 2009.

(3) The IRS issued detailed guidance on changes to the HSA rules made by the Tax Relief and Health Care Act of 2006. For example, the guidance explains that the maximum annual contribution to an HSA is the sum of the contribution limits determined separately for each month, based on eligibility and health plan coverage on the first day of the month. Under the “full contribution” rule, a taxpayer who is an eligible individual during the last month of a tax year is treated as having been an eligible individual during every month during the tax year for purposes of computing the annual HSA contribution. The guidance explains that the full contribution rule can increase, but not decrease, the contribution limit for an individual.

(4) The IRS provided guidance on a qualified HSA funding distribution from an individual's Individual Retirement Account (IRA) or Roth IRA to a Health Savings Account (HSA). Enacted as part of the Tax Relief and Health Care Act of 2006, the qualified HSA funding distribution is a one-time transfer from an individual's IRA to his or her HSA. It is generally excluded from gross income and not subject to the 10% early withdrawal penalty.

Stimulus payments. Based on an individual's direct deposit designation on his or her 2007 return, the special economic stimulus payment may have been direct deposited by the IRS into a tax-favored account, such as an IRA, a health savings account (HSA), an Archer medical savings account (MSA), a Coverdell education savings account (CESA), or a qualified tuition program account (QTP or Code Sec. 529 program). A taxpayer who took advantage of this feature may discover that he or she needs the stimulus payment in cash. The IRS has advised taxpayers that they may withdraw from a tax-favored account an amount not exceeding the amount of the economic stimulus payment directly deposited into that account, notwithstanding any tax law restrictions. If withdrawals are made no later than the time for filing the taxpayer's income tax return for 2008, plus extensions (or in the case of a CESA, the later of May 31, 2009, or the time for filing the taxpayer's income tax return for 2008, plus extensions), the amount withdrawn will be treated as neither contributed to nor distributed from the tax-favored account. Thus, the withdrawal won't be subject to regular federal income tax or to any additional tax or penalty tax.

AMT Liberalizations

• Under the Act, the Code Sec. 42 low-income housing tax credit and Code Sec. 47 rehabilitation credit may offset alternative minimum tax (AMT) liability (under current law, they can't). The Act accomplishes this result by treating the tentative minimum tax as being zero for determining the tax liability limit for the low-income housing credit and the rehabilitation credit. The AMT change applies for low-income housing credits determined under Code Sec. 42 attributable to buildings placed in service after Dec. 31, 2007, and for rehabilitation credits determined under Code Sec. 47 attributable to qualified rehabilitation expenses properly taken into account for periods after Dec. 31, 2007.
  
• For bonds issued after the enactment date, the Act provides that tax-exempt interest earned on the following bonds is not a preference item for AMT purposes: exempt facility bonds issued as part of an issue 95% or more of the net proceeds of which are used to provide qualified residential rental projects (as defined in Code Sec. 142(d) ); qualified mortgage bonds (as defined in Code Sec. 143(a) ); and qualified veterans' mortgage bonds (as defined in Code Sec. 143(b) ). Additionally, tax-exempt interest earned on the above three types of bonds is not included in the corporate AMT adjustment based on current earnings.

Business and Investment Changes

• The American Jobs Creation Act of 2004 gave taxpayers an election to take advantage of a liberalized rule for allocating interest expense between U.S. sources and foreign sources for purposes of determining a taxpayer's foreign tax credit limitation. Under current law, this election is not available to taxpayers until tax years beginning after 2008. The Act delays the phase-in of this new liberalized rule for two years (to tax years beginning after 2010). Special transition rules apply in the first year that the liberalized rule phases in.
  
• For tax years ending after Mar. 31, 2008, the Act allows a taxpayer to elect to accelerate the recognition of a portion of its historic AMT or research and development (R&D) credits in lieu of the bonus depreciation tax benefit that was included in the Economic Stimulus Act of 2008. The amount that a taxpayer receives is calculated based on the amount that it invests in property that would otherwise qualify for bonus depreciation under the Economic Stimulus Act of 2008. This amount is capped at the lesser of 6% of historic AMT and R&D credits or $30 million.
  
• The Act liberalizes the real estate investment trust (REIT) rules by clarifying that REITs can earn foreign currency income associated with real estate activities, increasing the permissible size of REIT investments in taxable REIT subsidiaries, modifying the REIT safe harbor for dealer sales, and extending the special rules for lodging facilities to health care facilities.
  
• The Act tinkers once again with the estimated tax payment rules for large corporations. First, it repeals the changes made by prior legislation for required installments of estimated tax for July, August, and September of 2012, and second, it increases the required installments of estimated tax for July, August, and September of 2013, as in effect on the enactment date, by 16.75%.

Tax Credits and Financing Mechanisms for Housing

• The state-by-state limit on the annual amount of Federal low-income housing tax credits that may be allocated by each state is increased from $2 per person to $2.20 per person for 2008 and 2009. States with small populations are provided with a special set-aside. The Act increases the small state set-aside by 10%.
  
• The Act carries numerous changes to the technical rules relating to low income housing tax credits.
  
• For expenses properly taken account for periods after Dec. 31, 2007, the Act allows taxpayers to qualify for the full amount of the rehabilitation credit so long as less than 50% of the rehabilitated building (increased from 35%) is leased to State and local governments or other tax-exempt entities.
  
• The Act clarifies that where a state issues a series of short-term bonds for low-income housing projects, these bonds will only be counted once against the limitation on the annual amount of tax-exempt housing bonds that each state may issue. The Act also updates the tax-exempt housing bond rules to conform certain aspects of these rules to the low-income housing tax credit rules.
  
• The Act increases the national limit on the annual amount of tax-exempt housing bonds that each state may issue. The national limit for 2008 is increased to allow for the issuance of an additional $11 billion of tax-exempt bonds to provide loans to first-time home buyers and to finance the construction of low-income rental housing. The Act also temporarily allows qualified mortgage revenue bonds to be used to refinance certain subprime loans.
  
• The Act temporarily allows bonds that are guaranteed by Federal home loan banks to be eligible for treatment as tax-exempt bonds regardless of whether the bonds are used to finance housing programs. The Act also temporarily allows qualified mortgage revenue bonds to be used to help individuals purchase new homes in Presidentially-declared disaster areas.

GO Zone Provisions

• The Act allows victims of Hurricanes Katrina, Wilma, or Rita the opportunity to adjust—interest and penalty free—casualty loss deductions claimed for their principal residences to reflect subsequently received grant payments to cover uninsured losses caused by the hurricanes. They can use amended income tax returns to take into account receipt of certain hurricane-related casualty loss grants by disallowing previously taken casualty loss deductions.
  
• For property placed in service after 2007, the Act waives the deadline on the construction of GO Zone property which is eligible for bonus depreciation.
  
• For purposes of the tax exempt bond financing provisions of the GO Zone Act of 2005, and effective as if included in that Act, the definition of the GO Zone includes two additional Alabama counties (Colbert and Dallas).

Briefly stated, the Farm Act, which became law during the last quarter, includes these key tax changes. Please contact us for when changes apply, as many of the changes have complex effective dates.

• Thanks to a key change, there is no self-employment tax on conservation reserve payments (government payments for conserving and improving soil, water and wildlife resources) received by an individual who is getting Social Security retirement or disability payments.
  
• The favorable tax treatment for qualified conservation contributions (certain transfers of qualified real property interests to qualified organizations exclusively for conservation purposes) is extended through 2009.
  
• There's a new deduction for farmers' endangered species recovery expenses.
  
• There's a one-year cut in the tax rate for a corporation's qualified timber gain.
  
• There's a new credit for cellulosic biofuels, plus a new credit for agricultural chemicals security expenses.
  
• All racehorses placed in service after 2008 and before 2014 are classified as three-year property for depreciation purposes, regardless of their age.
  
• Victims of the 2007 Kansas tornado disaster get a host of tax breaks similar to the tax breaks created for the victims of the 2005 Gulf area hurricanes.
  
• There's a new limitation on the amount of farming losses that non-C corporation taxpayers may deduct currently.
  
• Changes to the farm optional method and nonfarm optional method for computing net earnings from self-employment for post-2007 tax years allow electing taxpayers to pay more in optional self-employment taxes to gain more Social Security benefits.
  
• The Commodity Credit Corporation (CCC) is required to report the amount of market gain a farmer realizes when he or she repays a CCC market assistance loan.

In a nutshell, the Military Act, which also became law during the last quarter, includes these key changes. Please contact us for when changes apply, as many of the changes have complex effective dates.

• Rebate checks under the Stimulus Act go to those in the active military who file jointly even if one spouse does not have a Social Security number.
• The earned income credit for combat pay is revived and made permanent.
• The rule allowing reservists who are called up to make penalty-free premature withdrawals from company retirement plans or IRAs has been made permanent.
• Special bond rules to help qualified veterans obtain mortgage financing are permanently extended.
• Survivors of military personnel may gain additional retirement benefits under revised rules.
• The tax treatment for recipients of differential pay (an employer's voluntary payment of compensation that service members would otherwise been paid during active duty) is revised, and a new tax credit is created for small employers who pay it.
• The deadline for filing tax refund credit claims arising from Department of Veterans Affairs disability determinations has been extended.
• The rule allowing active duty reservists to make penalty-free withdrawals from retirement plans has been made permanent.
• A new rule allows a military death gratuity or amount received under the Servicemembers' Group Life Insurance (SGLI) program to be rolled over to a Roth IRA or Coverdell education savings account.
• o The homesale exclusion rules have been liberalized for Peace Corps volunteers and employees of the intelligence community.
• Members of the reserves who are called to active duty may withdraw unused amounts held in a health flexible spending account (health FSA).
• The tax rules for those who expatriate have been toughened significantly.